NEXBANK NOTES

AUGUST 2018 NEXBANK NOTES

By Jim Dondero, CFA and Mike Hurley, CMT Portfolio Managers

James Dondero, CFA
Portfolio Manager     

Mike Hurley, CMT
Portfolio Manager   

Our Fundamental View:
Good old-fashioned economics finally displaced geopolitical issues for the headlines last month, with the majority of stocks that have reported earnings showing better-than-expected results on both their top and bottom lines. That being said, the growth in earnings does appear to have peaked, particularly in the industrials sector.

Additionally, while talk of trade and tariffs has taken a back seat of late, we suspect this is only a temporary respite and do believe that their potential impacts pose a major risk to economies and markets globally.

Our Technical View:
Strong earnings made for a strong market, pushing the S&P 500 up nearly 4% during July. Stepping back however, while mega-cap names such as Apple (which became the first stock ever to achieve a$1T market capitalization) drove the index higher, fewer and fewer stocks are joining the party and scoring new highs alongside AAPL.

Additionally, as we noted last month, both commodities and interest rates are struggling at important areas of resistance. In the case of the 10-yr. US Treasury note, it is also at a very psychological number of 3%. The market appears to be far less concerned this time than when first approaching the area however, which makes us think that the 10-yr yield may surprise everyone by getting through this area.

Consensus Call of the Month:
As we discussed last month, we continue to believe the Federal Open Market Committee (FOMC) will again raise short term interest rates at their September meeting. This will likely lead to a further flattening of the yield curve here in the US, should the long end of the curve ease, or move sideways, as discussed above.

Contrarian Call of the Month:
We would also like to re-iterate our far less consensus view from last month, that stocks across the globe could see significant declines from current levels. While emerging markets such as China and Latin America are starting to bounce from their devastating declines, sentiment surrounding the developed markets remains complacent. We believe too complacent given the persistent geopolitical tensions and the increasingly weak technical footing on which stocks are trading.

Charts courtesy of TradeStation, current as of August 3, 2018

Statements in this communication may include forward-looking information and/or may be based on various assumptions. The forward-looking statements and other views or opinions expressed herein are made as of the date of this publication. Actual future results or occurrences may differ significantly from those anticipated and there is no guarantee that any particular outcome will come to pass. The statements made herein are subject to change at any time. Highland disclaims any obligation to update or revise any statements or views expressed herein.

No representation or warranty is made concerning the completeness or accuracy of the information contained herein. Some or all of the information provided herein may be or be based on statements of opinion. In addition, certain information provided herein may be based on third-party sources, which information, although believed to be accurate, has not been independently verified.

The information provided herein is not intended to be, nor should it be construed as an offer to sell or a solicitation of any offer to buy any securities. This commentary has not been reviewed or approved by any regulatory authority and has been prepared without regard to the individual financial circumstances or objectives of persons who may receive it. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives. Highland encourages any person Considering any action relating to the securities discussed herein to seek the advice of a financial advisor.

The Bloomberg Commodity Index is a broadly diversified commodity price index distributed by Bloomberg Indexes.

Advisory services offered through NexBank Securities, Inc, a registered investment advisor.

NOT FDIC INSURED. MAY LOSE VALUE. NO BANK GUARANTEE.

JULY 2018 NEXBANK NOTES

By Jim Dondero, CFA and Mike Hurley, CMT Portfolio Managers

James Dondero, CFA
Portfolio Manager     

Mike Hurley, CMT
Portfolio Manager   

Our Fundamental View:
Geopolitical issues remained front and center in June, with tariffs and trade wars moving from talk to reality. We continue to believe things will get worse before they get better, and that policies such as these are ultimately a major risk to economies and markets globally.

That being said, while nervous markets are likely to persist, we do believe the housing market in general, and REITs in particular, will remain firm. We also continue to like the opportunity fundamentally in the technology sector given the recent capital expenditure trends.

Our Technical View:
Market volatility also remained the norm in June, with stocks starting the month strongly, however giving up much of their gains by the time the calendar turned.

Technically speaking, the rally was quite weak, in that as the S&P 500 approached 2,800, far fewer stocks were making new 52-week highs. When considering this in context with the damage stocks suffered during the February correction, and is starting to look as if stocks are forming an important cyclical top.

Finally, we also believe interest rates and commodities will continue to struggle. Not only are both battling stiff resistance on their charts, but slowing global growth would obviously reduce demand for the commodities, while reduced inflationary pressures would likely help rates ease.

Consensus Call of the Month:
As noted above, we think reduced inflationary pressures will likely help interest rates on the long end of the curve start to ease. We also believe the Federal Open Market Committee (FOMC) will continue to raise short term interest rates. This would lead to the widely expected further flattening of the yield curve here in the US.

Contrarian Call of the Month:
Far less consensus however, is our view that stocks across the globe could see significant declines from current levels. Despite punishing losses already being endured in emerging markets such as China and Latin America, sentiment remains complacent regarding developed markets. We believe it is too complacent given the escalating geopolitical tension and the weak technical footing on which markets are trading.

Charts courtesy of TradeStation, current as of June 29, 2018

Statements in this communication may include forward-looking information and/or may be based on various assumptions. The forward-looking statements and other views or opinions expressed herein are made as of the date of this publication. Actual future results or occurrences may differ significantly from those anticipated and there is no guarantee that any particular outcome will come to pass. The statements made herein are subject to change at any time. Highland disclaims any obligation to update or revise any statements or views expressed herein.

No representation or warranty is made concerning the completeness or accuracy of the information contained herein. Some or all of the information provided herein may be or be based on statements of opinion. In addition, certain information provided herein may be based on third-party sources, which information, although believed to be accurate, has not been independently verified.

The information provided herein is not intended to be, nor should it be construed as an offer to sell or a solicitation of any offer to buy any securities. This commentary has not been reviewed or approved by any regulatory authority and has been prepared without regard to the individual financial circumstances or objectives of persons who may receive it. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives. Highland encourages any person Considering any action relating to the securities discussed herein to seek the advice of a financial advisor.

The Bloomberg Commodity Index is a broadly diversified commodity price index distributed by Bloomberg Indexes.

Advisory services offered through NexBank Securities, Inc, a registered investment advisor.

NOT FDIC INSURED. MAY LOSE VALUE. NO BANK GUARANTEE.

JUNE 2018 NEXBANK NOTES

By Jim Dondero, CFA and Mike Hurley, CMT Portfolio Managers

James Dondero, CFA
Portfolio Manager     

Mike Hurley, CMT
Portfolio Manager   

Our Fundamental View:
Geopolitical issues again took center stage last month, as both tempers, and talk of tariffs, flared. This intensified concerns of a potential economic slowdown both in the US, and globally. As we noted last month however, we believe the US economic growth is insulated versus Brazil & Germany. That being said, we do believe the rate of growth may start to ebb.

Regarding interest rates, we continue to think the Federal Open Market Committee (FOMC) will raise interest rates at least twice more this year. The first at their meeting later this month, and then at least once more at their September and/or December meetings. Despite these increases however, we do not expect the yield curve in the US to invert. This is important, as inverted yield curves typically lead to recessions, and significant stock market corrections.

Our Technical View:
May was kind to the markets, with the broad market averages posting solid gains. While most were up in the 2-3% range, the NASDAQ tacked on over 5% and the Russell 2000 surged by nearly 6% on the month.

We continue to believe the market is in good shape technically, and that further gains are likely ahead for stocks. Additionally, since our piece last month the Russell 2000 Index has moved to an all-time high – despite the concerns surrounding tariffs and other geopolitical uncertainties. Action which is not only bullish for the small cap stocks themselves, but healthy for the overall market as well. That being said, we continue to aggressively monitor the market for any signs of narrowing breadth and leadership.

Consensus Call of the Month:
As noted above, among the more widely held views in the market these days, is that the FOMC will raise short term interest rates by ¼% at their June meeting. While there are rumblings that they may increase them by a full ½%, we agree with the consensus view of a mere ¼% hike.

Contrarian Call of the Month:
On the other side of the coin, is our view that the price of oil goes higher from here. More specifically, given the strong demand fundamentals in the oil market we think crude oil could hit $80 by year end, and most certainly has a better chance of seeing $70 before $60.

Charts courtesy of TradeStation, current as of June 5, 2018

Statements in this communication may include forward-looking information and/or may be based on various assumptions. The forward-looking statements and other views or opinions expressed herein are made as of the date of this publication. Actual future results or occurrences may differ significantly from those anticipated and there is no guarantee that any particular outcome will come to pass. The statements made herein are subject to change at any time. Highland disclaims any obligation to update or revise any statements or views expressed herein.

No representation or warranty is made concerning the completeness or accuracy of the information contained herein. Some or all of the information provided herein may be or be based on statements of opinion. In addition, certain information provided herein may be based on third-party sources, which information, although believed to be accurate, has not been independently verified.

The information provided herein is not intended to be, nor should it be construed as an offer to sell or a solicitation of any offer to buy any securities. This commentary has not been reviewed or approved by any regulatory authority and has been prepared without regard to the individual financial circumstances or objectives of persons who may receive it. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives. Highland encourages any person Considering any action relating to the securities discussed herein to seek the advice of a financial advisor.

The Bloomberg Commodity Index is a broadly diversified commodity price index distributed by Bloomberg Indexes.

Advisory services offered through NexBank Securities, Inc, a registered investment advisor.

NOT FDIC INSURED. MAY LOSE VALUE. NO BANK GUARANTEE.

MAY 2018 NEXBANK NOTES

By Jim Dondero, CFA and Mike Hurley, CMT Portfolio Managers

James Dondero, CFA
Portfolio Manager     

Mike Hurley, CMT
Portfolio Manager   

The Economy:
Fears intensified last month that global economic growth might be slowing. The culprits being slowing stimulus in China, as well as industrial production across Europe. Our view is that while the US is somewhat insulated (and hence we believe will remain stronger than most across the globe), a slowing global economy may well impact us, and cause US growth to slow as well.

While the rate of growth may be starting to slow, economies across the world are still growing. Economic growth creates increased demand for raw materials and labor, and hence their cost. Our point being, while we continue to believe inflation will peak in the second half of this year it remains one of the biggest risks to markets, and investors, going forward.

The Markets:
Speaking of markets, they were little changed in April. The action was quite significant however, in that the S&P 500 again tested the key 2,600 area successfully. The action within the sectors has been encouraging as well, in that cyclical & consumer discretionary stocks continue to perform better than ‘defensive’ sectors such as consumer staples, utilities and health care.

Bonds were also little changed on the month, with the benchmark 10-yr US Treasury Note stalling at the very psychological 3% area. While we do believe the 30 year decline in interest rates is over, the 10-yr may well struggle in this area for some time.

Rising rates have been widely blamed for the volatility in stocks. It is our view however that widening credit spreads have been the real culprit. While the current difference of 1½% is still contained, spreads are clearly moving off their February lows.

Finally, as noted above, the embers of inflation are indeed smoldering. The Bloomberg Commodity Index has been basing since the collapse in oil, and while it has yet to ‘breakout’, investors may consider adding commodities to their portfolios for protection.

Statements in this communication may include forward-looking information and/or may be based on various assumptions. The forward-looking statements and other views or opinions expressed herein are made as of the date of this publication. Actual future results or occurrences may differ significantly from those anticipated and there is no guarantee that any particular outcome will come to pass. The statements made herein are subject to change at any time. Highland disclaims any obligation to update or revise any statements or views expressed herein.

No representation or warranty is made concerning the completeness or accuracy of the information contained herein. Some or all of the information provided herein may be or be based on statements of opinion. In addition, certain information provided herein may be based on third-party sources, which information, although believed to be accurate, has not been independently verified.

The information provided herein is not intended to be, nor should it be construed as an offer to sell or a solicitation of any offer to buy any securities. This commentary has not been reviewed or approved by any regulatory authority and has been prepared without regard to the individual financial circumstances or objectives of persons who may receive it. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives. Highland encourages any person Considering any action relating to the securities discussed herein to seek the advice of a financial advisor.

The Bloomberg Commodity Index is a broadly diversified commodity price index distributed by Bloomberg Indexes.

Advisory services offered through NexBank Securities, Inc, a registered investment advisor.

NOT FDIC INSURED. MAY LOSE VALUE. NO BANK GUARANTEE.