here

Market
Commentary
Brian M. Barish, CFA
1
Cambiar Insights
3Q 2015
Global equity markets retreated by some 8-15% in the third quarter, with the preponderance of the damage occurring during an
eight-day span in mid-August. During this short period, the S&P 500 Index fell by 11%, the small cap Russell 2000 Index by 9%,
the Dow Jones Industrial Average by 11%, and the international MSCI EAFE Index declined by 10%. On August 11th, China made
a small (2%) devaluation of its currency versus the US$, ostensibly to gain entry in the SDR “reserve currency” bucket, which
upset Asian and commodity markets. By August 18th, various technical indicators flashed red, leading technical and momentum
strategies to sell aggressively and lower net exposures. At that point, quantitative and ETF strategies went a bit haywire, and likely
exaggerated the scope of the declines, inducing disorderly trading and some degree of panic in mid-August. This is our current
interpretation of the sequence of events. Leading up to that point, stocks were not acting “good” so to speak, with small cap
stocks, industrial cyclical stocks, semiconductor stocks, and transportation stocks all in some degree of broad decline from their
highs attained earlier in the year. Most markets bounced following this trading episode, only to retreat again following the FOMC
September meeting, at which time the Fed passed on raising interest rates. The Fed decision quashed most financial stocks, and the
rest of the market just followed suit. Through September 30th, most global indices were down a high single digit to low double digit
percentage in US$ terms on a year-to-date basis.
The top-to-bottom moves do not quite qualify as a full-fledged bear market (a >20% decline), but do register as a fairly steep
correction, with broader global declines in developed markets of roughly 14-17%. The worst developed market performer has been
Germany, down a full bear market 24% since early April, as a consequence of the substantial industrial concentration in the index
and a fairly shocking scandal at the country’s largest employer, Volkswagen. China’s impressively speculative “A” share market
declined by 43% from June to late September, ending the quarter about flat for 2015. This is a locals-only stock market that should
not be viewed as a serious indicator of China’s financial conditions. Other emerging markets have shed a copious amount of value in
dollar terms this year.
The declines this summer are reminiscent of a similar
explosive downside move in August 2011. At that time, the
United States’ sovereign credit rating was lowered by rating
The declines this summer are
agency S&P to AA+ from AAA, triggering fears of profound
reminiscent of a similar explosive
capital markets dislocations and malfunctions. While this
downside move in August 2011.
downside scenario did not come to pass in the US (bond yields
declined actually following the downgrade), European bond
and interbank credit markets did indeed seize up – leading to
existential questions about the survivability of the Euro and
the appropriateness of monetary policies in Europe and Asia. Global growth prospects deteriorated, resulting in sharp valuation
compression for many corresponding growth businesses. Since 2011, the US stock market and economic strength have dwarfed the
rest of the world. Many of the above-mentioned uncertainties were resolved constructively, and the 2011 episode turned into the
best buy-point in the markets since the early parts of 2009. Seasonally, late September to October tends to be the optimal time of
year to be a buyer versus a seller. This factoid is (strangely) reliable over the years.
There are faint echoes of 2011 in the recent declines. The China currency move was similarly unplanned for, and credit costs have
risen for corporate and high yield borrowers since the Spring. Markets are unsurprisingly skittish about the future of US interest
rate policy as well as the likelihood of the first significant credit losses in the current business cycle emanating from commodity
businesses. Stocks tend to be highly correlated with high yield bond prices, such that the high yield market will need to get better in
order for stocks to revisit their high water marks from earlier in the year. Outside of bond spreads widening, the issues at hand tend
to be less definitive; in this sense, time and patience will be valuable assets for investors. I believe the following factors should be
monitored, but should resolve themselves in some more durable (read: less uncertain) form over the next 12-24 months.
What is the Real Story in China?
We detailed these issues at the end of the second quarter rather presciently (The China Syndrome). China’s economic leadership,
once well regarded as forward-looking, has been rather left footed of late. For example, though the Chinese currency devaluation in
August was just 2%, the move undercut the Yuan-$ peg, a basic principle of stability in markets, and brought into greater focus the
issues surrounding China and that nation’s large role in overall global growth this century. The Yuan may have been devalued for a
credible reason (to gain inclusion in the SDR basket of reserve currencies), but was ineptly telegraphed to the markets. On the back
of China’s stock market follies and clearly implausible official economic statistics, it creates a credibility problem for the government
and its ability to foster stability in the context of a very obviously difficult economic transition. Capital flight from China has
unsurprisingly grown. We share the market’s skepticism, but would note that a lack of demand for physical infrastructure materials
2
Market Commentary
3Q 2015
and pricey items (like cars) may not translate into diminished demand for smaller personal luxuries.
Second, greater skepticism about China means greater skepticism about commodity and industrial demand longer term. It is no
surprise that these sectors have underperformed as the China growth story appears questionable, squishing longer term futures
curves further; commodity sectors are now likely to generate credit losses in 2016+. Overcapacity is a very real problem globally,
which does not bode well for industrial stocks (broadly speaking). We are starting to see some opportunities as the selling becomes
more indiscriminate, but would view these as case-by-case, versus a broader buy signal for the sector.
Third, we can now add Fed uncertainty to the mix. The Fed has gone out of its way to provide clarity on its policies and their
expected duration since QE and ZIRP (zero interest rate policy) began in 2008-09. This approach continued into 2015, with a clear
trigger to move away from a 0% Fed Funds rate on unemployment and labor slack, along with “confidence” about its 2% long term
inflation target being realized. Having taken a pass on a widely telegraphed September move off of zero – notwithstanding high
nominal private sector GDP growth, 5.1% unemployment rate, and 40-year lows in new unemployment claims (all consistent with
nearly full employment) – markets now can no longer concisely articulate what the Fed is looking at precisely, or how it will respond
to such data. We had declared a Fed liftoff in late 2015 as being the most important financial event of the year, and though it may
yet occur in the next 6 months, the Fed has created needless uncertainty, which has indeed tightened global credit conditions.
Having recently traveled through Asia, it was clear to us that local governments have equated the Fed uncertainty to the equivalent
of 3 or so tightenings. Getting it (a raise in rates) over with has value. In academic circles, there is a healthy debate on the merits
of continued ZIRP or moving off of 0% for the sake of some policy normalization. Without conceding to either argument, it is clear
enough to me that policy uncertainty is quantifiably worse (more restrictive) than a small tightening could be. Has 8 years of
sustained ZIRP actually caused any tradable goods inflation, or just asset price inflation? Expressed differently, perhaps the financial
system would function more smoothly with a positive interest rate, increasing money velocity? These are fair questions to ask, and
there are not definitive answers.
We still think the Fed will move, eventually. As we best understand it, the Yellen Fed is rather afraid of making a “mistake” by
prematurely raising rates above 0%. In Washington, there is residual political pressure on the $4+ trillion size of the Fed’s balance
sheet, meaning that the bar for any further QE is very high should a mistake indeed be made. So the more we think about it, the
Fed has painted itself into a difficult corner, and may need a big inflation-print to actually raise rates. A reactive versus proactive
central bank is a net negative. Financial stocks and bond spreads have accordingly become more discounted. This isn’t a bad thing
for investors necessarily looking forward (a more favorable risk-return is presumptive), but it is not an ideal situation.
Last, volatility and poor technicals tend to be self-fulfilling until they exhaust themselves. Take the aforementioned items together,
and it means a lot of stocks have been soft – leading to poor breadth and a difficult tape. The average US stock is down 15% since
mid-April, and the average international stock has declined 17%. Broad weakness in equities has caused a technical breakdown in
the markets, and triggered a fairly standard run out of the markets by leveraged players, which in turn pushed up volatility to levels
not seen since 2011 (and that was pretty ugly). As market indices fall below their moving averages, the selling begets selling, and
people cash out their winners quickly as frustrations mount. A decline in volatility would probably have a more positive/reversing
effect. That said, markets are generally higher than in 2011 and the business cycle is further advanced; as such, a recovery from
the lows may be more modest, especially with a general election looming.
We have ventured broad analyses of key business sectors in our quarterly letters in the past few years. What better time than in the
wake of the on-going frustration of indeterminate Fed Policy uncertainty than to ponder the value of investing in bank stocks at this
point in the cycle?
We appreciate your continued confidence in Cambiar Investors.
Brian M. Barish, CFA
President
3
Market Commentary
3Q 2015
U.S. Bank Stocks - Waiting for the Fed Liftoff
Ania A. Aldrich, CFA - Principal
Through June, bank stocks were one of the best performing sectors within the
S&P 500 Index – supported by a stronger economy and low unemployment,
which would lead the Fed to raise rates later in the year and thereby provide
widening net interest margins. Yet with the Fed passing at the FOMC meeting
in September, investors have recalibrated expectations, and banks reversed
their performance for the year. Bank stocks are not particularly cheap on
an historical context; the average bank is trading at a Price/Earnings (P/E)
multiple of 12x, which is 70% of the S&P 500’s 17x P/E multiple, versus an
average historical valuation of 73% of the S&P 500 Index. Valuations embed
some optionality on an eventual interest rate increase, offset by risks of
greater credit losses as we move later into the economic cycle.
A key source of bank earnings since the dawn of banking itself is their
capacity to slightly underpay depositors, which is very hard to do with short term rates pegged to 0% globally. Historically, deposits
have created +100–150 basis points in positive spread versus the Fed Funds rate. Currently, this spread is -10 bps, based on a Fed
Funds rate that has floated around 15bps vs. a rate on interest bearing deposits that is closer to 25bps. Persistently low rates will
clearly be a headwind for the foreseeable future, but there are levers to drive bank earnings higher at this point in the cycle.
Credit cycles can be more powerful determinants of bank profitability than interest rates. The recent global slowdown and
substantial fundamental deterioration in certain commodity sectors presents the first likely systemic credit losses the current cycle.
The credit cycle post Great Recession has been long, and has resulted in NCO’s (net charge-offs) near 40 bps, versus an historical
range of 90-00 bps. Clearly, some of this improvement has been driven by the impact of regulatory pressure; i.e., banks are not
lending as much to certain sectors which traditionally exhibited higher losses. Loan underwriting has also improved significantly,
resulting in lower losses. Could the banks’ earnings become less volatile and more “utility-like,” as some have argued? We won’t
really know until the next full credit cycle, which could be few years away, as data broadly suggests the cycle remains in the
expansion phase. In a typical later credit cycle, higher loss provisions pressure banks’ earnings, but are offset by wider interest
spreads. Given that interest rates are abnormally low this time around, we would expect the Fed to raise rates before the full credit
cycle and related losses are upon us. Higher rates should allow for improved profitability and earnings growth at banks, which
theoretically could also result in more credit expansion. Various banks have been vocal about their unwillingness to provide credit at
these historically low spreads. Prior to the FOMC September meeting, consensus bank estimates presumed a hike in rates starting
this year – as can be seen in the following graph of net interest income (NII) growth. A Fed Funds rate increase of 0.75%-1.00%
would provide a significant earning lift to bank stocks, making them much more attractively valued at around 9-10x earnings, vs. a
current 12x average.
Average NII Growth Rate, Large - Cap Banks
(2012-2016E)
Source: Sanford Bernstein
4
Market Commentary
3Q 2015
NII on average contributes ~50% of banks’ revenue, thus it substantially impacts the direction of earnings. Given the absence of
a rate increase at the September Fed meeting, banks’ earnings estimates for 2015 have been revised downward. Not surprising,
the vague outlook for rates (and therefore NII) has compressed valuations in the banking space. Cambiar will sometimes take
advantage of these kinds of excessive sentiment swings to add to our bank positions; however, the preference is to focus on
companies that possess their own self-help levers to grow earnings and sustain their capital position in a lower for longer rate
environment.
To offset some of the top-line revenue pressure, banks continue to adjust their expense basis. Banks’ efficiency ratios (expense to
revenue) are still mostly above the pre-crisis levels. The emergence of mobile banking and other technology-related efficiencies
provide ample opportunities for banks to cut costs such as branch network expenditures.
In general, U.S. banks are still growing loans, with some exceptions in commodities and manufacturing areas. Consumer loan
growth has been strong, led by credit cards and autos. On the other hand, mortgage underwriting remains tight post Great
Recession, as regulations surrounding mortgage lending continue to evolve and an unclear long-term role for GSEs such as Fannie
Mae and Freddie Mac, which remain in conservatorship. Given the size of mortgage debt as a percentage of consumer borrowings
(67%) and a lower societal preference to own homes in general, low mortgage underwriting volume has been a drag on loan growth.
Average FICO scores for Fannie/Freddie mortgages (these two guarantee close to 50% of all mortgages) have increased significantly
from pre-financial crisis levels. Although the FICO score requirements went down slightly in 2013, they rose in 2014 due to the
regulatory pressures. Loan to value ratios are also conservative, at an average of 75%.
Average Credit Score for Mortgage Loans
(As Reported by Fannie/Freddie)
770
760
750
740
730
720
710
700
2005
2006
2007
2008
2009
2010
2011
Freddie Mac
2012
2013
2014
1Q15 2Q15
Fannie Mae
Source: Deutsche Bank
Revolving Credit as a
% of Total Consumer Credit
Another potential lever of support for continued loan growth in the
U.S. could be a reversal in the multi-year decline in consumers’
revolving credit growth. Revolving credit now represents about 26%
of total consumer credit, vs. levels closer to 40% in the pre-crisis
years. The decline can be explained mostly by the consumer deleveraging post the financial crisis; however, we are starting to see
early signs of stabilization here.
Source: Deutsche Bank
5
Market Commentary
3Q 2015
Valuing Banks
Given their recent pullback, banks have become more attractive – with several trading near or below Tangible Book Value (TBV).
There is an unusually tight relationship between cost of equity capital (around 9- 10%) and book value multiples for banks. For
example, US Bancorp is expected to deliver a return of ~20% on its TBV this year, and the stock trades close to 2x TBV. Similarly,
Citigroup is expected to deliver a return of 9-10% this year and trades at 0.9x P/B. Cambiar initiated a position in Citigroup earlier
this year; the investment thesis was based on what we viewed to be a compressed valuation and some clear levers for improving its
returns to levels similar to its peers (11-12%). Although we don’t expect Citigroup to reach the return levels of US Bancorp given
the company’s different business mix and significantly higher capital requirements, we do expect this disparity in valuation to close.
The very large banks (such as Citigroup) have higher capital requirements and regulatory scrutiny, which does constrain ROE (return
on equity) potential. Other banks held within the Cambiar domestic portfolios include: Citizen’s Financial Group (0.7x P/B, a similar
potential improving returns); Capital One Financial (0.9x P/B), which generates generally higher returns in its expansive credit card
business; BBCN Bancorp (1.3x P/B), a regional bank that caters to mostly Asian-American customers; and BB&T Corp (1.1x P/B), a
Southeast regional bank growing both organically an inorganically through acquisitions, a relative rarity in today’s tightly regulated
banking system.
Domestic Banks: Return on Equity vs. Price to Book
2.0x
PRICE/BOOK
1.7x
1.5x
Bank valuation correlates tightly to ROE. Bank stocks
1.2x
perform best if they can move their sustainable ROE
upwards and be repriced accordingly. Higher short rates
would raise everybody’s ROE.
1.0x
0.7x
7.0
8.0
9.0
10.0
11.0
12.0
13.0
14.0
15.0
16.0
RETURN ON EQUITY (%)
Bank of America
BB&T
Citigroup
JP Morgan
PNC Financial
Regions Financial
SunTrust
US Bancorp
Wells Fargo
Capital One
Citizens Financial
BBCN
FirstMerit
TCF
Zions Bancorp
Source: Bloomberg
6
Market Commentary
3Q 2015
International Financial Stocks In a Low-Rate World
Todd L. Edwards, PhD - Principal
The most recent decision by the Federal Reserve to postpone its first post-crisis interest rate hike has led to a number of sharp
moves in global financial markets, including a respite in dollar strength, a rally in energy and materials stocks, and signs of life in
emerging market currencies and stocks. These reversals of recent trends undoubtedly warrant further discussion, but the driving
factor of the shift – in effect, the Fed’s leadership in keeping global interest rates lower for longer – also begs the question of whether
low rates necessarily imply lower returns in financial sector stocks. The challenge is actually two-fold: lower rates represent just one
of a number of threats to profits or returns, while higher capital requirements (or equity) essentially raise the hurdle against which
profitability is measured (i.e. return-on-equity, or ROE). Combined, these factors constrain the valuations of financial sector stocks.
The general issue then is how investors should position themselves within the financial services sector.
Despite the obvious pressures, it is Cambiar’s view that there is simply no “one size fits all” approach to positioning within financial
services. As a sector, financial services has been an outperforming segment of the market since 2012. This outperformance has
corresponded to dramatic monetary stimulus efforts emanating from both Europe and Japan – ironically, the same policies that are
driving super-low interest rates and therefore lower interest margins. In other words, there are both strong benefits and unavoidable
costs associated with stimulus programs. In our opinion, there is simply too much stimulus in the developed world to adopt a
decidedly negative/underweight position in this critical sector. That said, a dramatic overweight (based on QE-led economic recovery
and asset price inflation) does not make compelling sense either. Individual stock selection, with a focus on both non-traditional
financials that can thrive in a low rate world as well as more traditional financials that combine solid operating fundamentals with low
valuations, should make the difference.
As suggested earlier, returns (particularly for banks) are under pressure while capital requirements are on the rise; as such, ROEs
may never return to pre-2007 levels. This change in market dynamics means that an over-reliance on historical valuation ranges
to guide future entry/exit points will be less helpful in the research process. However, the relationship between multiples and ROE
remains solid; as such our focus is on what we consider to be mismatches between valuation and near- to medium-term profitability.
Cambiar’s financial positions in the International Equity portfolio can be generally segregated into three categories: (1) attractively
valued companies when assessed on near-term profitability (e.g., Japanese banks), (2) financials where our expectations for
medium-term profitability are significantly higher than more pessimistic market expectations (e.g., European banks), and (3) nonbanking financial companies that may actually thrive in a low rate world (e.g., real estate/property companies and asset gatherers).
Profitability and Valuations:
Return-on-Equity Drives PB Multiples, EAFE Bank Constituents
The tight relationship between financial stocks’ (especially banks) valuations and their respective profitability as measured by ROE
is exceedingly robust. The graph below illustrates this strong relationship, as well as the precipitous decline in both profitability and
valuations associated with the global financial crisis and its aftermath.
2.2x 2.0x Pre-GFC ROEs are no longer achievable
18 for banks, but low Net Interest Margins
currently depress profitability
15 Price to Book 1.6x 12 1.4x 9 1.2x 1.0x 6 0.8x 0.6x 3 Jun-­‐05 Jun-­‐06 Jun-­‐07 Jun-­‐08 Jun-­‐09 Jun-­‐10 Jun-­‐11 Jun-­‐12 Jun-­‐13 Jun-­‐14 Jun-­‐15 Source: Bloomberg
P/B ROE Return on Equity (%) 1.8x As we can see, historical valuations, particularly those of the pre-crisis
boom years, are not all that useful by themselves in identifying attractive
stocks today, as historical ROEs are no longer realistically achievable.
The numerator in ROE (R, or return) has been pressured as firms and
households have reduced leverage, banks have been stingier in providing
credit, and low interest rates have pressured net interest margins. In
other words, both volumes and pricing have been negatively impacted.
Likewise, the denominator (the E, or equity) has risen dramatically as
regulators have demanded higher and higher levels of capital. The net
result is lower overall ROE metrics, which not surprisingly produce lower
P/B multiples. One compensating factor is asset quality; quantitative
7
Market Commentary
3Q 2015
easing and the asset price appreciation it causes support asset quality and improved profits, at least as compared to what might
have occurred in its absence.
International Banks: Return on Equity vs Price to Book
3.5x
3.0x
PRICE/BOOK
2.5x
2.0x
1.5x
1.0x
0.5x
6
8
10
12
14
16
18
20
22
24
RETURN ON EQUITY (%)
BBVA
Societe Generale
Barclays
Intesa Sanpaolo
UBS Group
Swedbank
Sumitomo Mitsui Fin
Mitsubishi Fin
Itau Unibanco
Bank Central Asia
Source: Bloomberg
Traditional banks remain a large part of the investable international universe. There are two basic types of opportunities within
the banks. First are classically depressed bank stocks that operate in an improving macro environment. The best examples are
the Japanese “megabanks”, which remain priced at significant discounts to book value, and in a few notable cases well below what
can be justified on existing levels of profitability. Current holding Sumitomo Mitsui Financial Group (SMFG) is a good example; the
stock trades at 0.7x P/B, with an ROE of 9-10%. The reason for this valuation anomaly is Japan’s persistent deflation – it is entirely
rational to see low bank multiples in a country that has suffered from decades of insufficient economic activity, massive deleveraging,
excess savings and super-low interest rates. However, it is also reasonable to expect higher multiples for banks that are generating
higher profits, as Japan’s climb out of deflation drives increased lending activity and higher credit quality. Earnings from overseas
markets and increasing fee income are additional profitability drivers that do not appear to be fully appreciated as compared to the
inexpensive valuations assigned to many Japanese banks.
The second general area of opportunity centers on banks that might be considered “fairly valued” on existing profitability, but still
at low multiples of a more optimistic future. An example of this type of situation is HSBC, a UK bank that trades at 0.8x P/B with
an ROE of 8%. The bank has been in a long term process of streamlining its businesses, including exiting businesses that exhibit
sub-par profitability (HSBC most recently sold its bank in Brazil). Like most banks, HSBC has undertaken this process at the same
time that it has been increasing capital. The result is a stagnation of HSBC’s ROE levels. It is Cambiar’s contention that HSBC’s core
businesses should begin to not only show revenue momentum, but also steadily higher returns, led by its highly profitable Asian
businesses. Likewise, the bank is more than sufficiently capitalized, a comparative advantage among European peers. There is no
question that HSBC would benefit from higher rates. Given its strong deposit franchise in Hong Kong and the UK, it has a loan-todeposit ratio well under 100%. As a result, HSBC loans excess funds in the inter-bank market at exceedingly low rates; any uptick in
rates will therefore immediately benefit earnings. However, the upturn in ROE does not depend on higher rates; evidence of steady
improvement should drive a more generous multiple for this bank. Higher interest rates, should they come, represent incremental
additional upside for the HSBC investment case.
Given the mixed backdrop, we have built a blend of different return drivers into the International portfolio’s financial holdings. An
additional focus has been the identification of companies that can potentially thrive in a low-rate world. Examples include UnibailRodamco (real estate/property company), Julius Baer (private banking) and Markit (financial data services/technology). While each
of these businesses may correlate with credit-sensitive banks in the short run, they do not face the same regulatory challenges nor
the longer-term threats to returns.
8
Market Commentary
3Q 2015
Modern Stock Trading In The Electronic Jungle
Rod Hostetler - Director, Trading
Not that long ago, human beings noisily traded stocks on the floors of the world’s stock exchanges, and specialists were charged with
the task of maintaining order when buying or selling became imbalanced. That world has long since passed, and has now almost
completely been turned over to electronic trading. While electronic trading is far cheaper in terms of raw transaction costs, it has
altered the structure of the markets such that it is difficult to predict market behaviors in the event of more severe stress. The
“Flash Crash” in May 2010 brought to light how regulators, exchanges and traders need to adjust and adapt in an evolving modern
world of trading, as electronic venues in effect caused exaggerated and at times highly illogical trades to be placed and executed
by computer algorithms. With the exploding growth in the number of trading venues over the past decade that include dark pools,
crossing networks and electronic communication networks, market fragmentation has challenged regulators to keep up with the
technology.
The markets threw out another strong reminder in the third quarter that severe volatility and liquidity dislocations can occur when
the system is stressed. On August 24th, uncertainty and fear in the market set off a fast wave of selling in electronic markets,
triggering for the first time many of the mechanisms put in place after the 2010 Flash Crash. According to industry experts, the
results of the tests were mixed; yet unlike the Flash Crash, the market dislocation happened right before the market opened until
soon after the open. Rules put in place since the 2010 Flash Crash include: Rule 48, which permits stocks to open late and without
pre-opening price indications, the Limit Up-Limit Down (LULD) price band, which was triggered hundreds of times during the first
hours of trading, and limits on index futures, which hit both -5% limit-down prices and a -7% limit-down band all within a minute
after the open, necessitating a market-wide halt. For those securities that were able to open for trading, prices fell quickly (26% of
Russell 3000 stocks traded at lows of more than -10% from the prior close, and there were 1,278 volatility trading pauses in 471
symbols). No securities traded at what are called stub quotes (typically at $0.01) due to the implementation of LULD price bands
and market maker quoting, and only a few erroneous trades had to be broken. The event still calls for additional scrutiny, but
overall it showed that the mechanisms in place are a step in the right direction – as the market performed much better as the day
progressed.
The trading of Exchange Traded Funds (ETFs) and related products during this stress episode was not as successful. ETFs have
become a very large slice of the market, and account for about a third of dollar volume traded among NMS (National Market System)
securities. There are many trading sessions where ETF-derived volume in individual stocks greatly exceeds non-ETF volume, which
in a market-panic situation can lead to very imbalanced trading and some irrational pricing situations. One study showed that on
August 24th at least 8 ETFs showed “flash-crash” style drops at the market open, and circuit breakers were implemented more than
600 times on ETFs. A large number of ETFs traded at severe discounts to their underlying holdings during the volatile trading period.
The SEC still has plenty of work to do with exchanges to find ways to improve the process with circuit-breakers and trading curbs
in extreme volatile markets for these instruments. We would note parenthetically that given an enormous increase in passive and
ETF-based investment strategies in the past few years, it should not surprise investors to see more pronounced price-dislocations,
auto-correlation of returns, and liquidity effects during periods of even moderate market stress. For daily trading and position
management, Cambiar believes it is essential to employ limit orders for almost all trades, and to steer clear of stop-loss type orders
that can easily be set off by electronic systems run amok.
Market event statistics source: JP Morgan
Certain information contained in this communication constitutes “forward-looking statements”. Due to market risk and uncertainties,
actual events or results, or the actual performance of any of the Cambiar strategies, may differ materially from that reflected or
contemplated in such forward-looking statements. All information is provided for informational purposes only.The information
provided is not intended to be, and should not be construed as, investment, legal or tax advice. Nothing contained herein should be
construed as a recommendation or advice to purchase or sell any security, investment, or portfolio allocation.
9
Market Commentary
3Q 2015