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MARKET SIGNALS

Source: The New Yorker

THE MATERIAL COVERED IN THIS PRESENTATION IS

THE OPINION OF THE PRESENTER AND SHOULD

NOT BE CONSTRUED AS A RECOMMENDATION TO

BUY OR SELL ANY OF THE SECURITIES MENTIONED.

INVESTORS SHOULD SEEK THE COUNSEL OF THEIR

FINANCIAL ADVISOR BEFORE MAKING ANY KIND

OF INVESTMENT. THE PRESENTER MAY OR MAY

NOT HOLD LONG OR SHORT POSITIONS IN ANY

OF THE SECURITIES MENTIONED.

The Facts

We are not entering another Great

Depression. Following the Stock Market crash of 1929 the government:

-raised taxes, increased interest rates

-Today we are doing just the opposite

A Typical Recession

Averages 14 months in length

Economic activity declines by 2.5%

Unemployment rises by 2%

- If unemployed, the average tenure is

six weeks.

We’ve had two recessions in the last 25

years (early 1990’s and 2000 – 2001).

They always end and the economy

always rises to a higher plateau.

Stimulating Enough?

Spring 2008

$170 Billion

Fall 2008

$350 Billion

Tax Rebates

Drop in gas prices

January 2009

$790 Billion Economic Stimulus Plan

Since World War II

We’ve had 10 Recessions

24 stock declines of 10% or greater

13 stock declines of 20% or greater

What Counts is Corporate Earnings

Since WW II

Corporate profits up 63 fold

Stock prices have risen 71 fold

Darts vs. Professional Stock

Pickers

Oil Wells

Oil

Often Overlooked Oil

Dreco Energy Services

Price Graph

31 May 26June 26 th

July 23 rd

Aug 20 th

Sept. 19 th

Oct. 15 th

Nov 29Nov

Hang In There

Over the past 30 years the stock market has produced an average annual rate of return around 10%.

If you were out of the market during the best 30 months your return would drop to just 3%.

Bad Timing?

“People generally feel a stronger impulse to avoid losses than acquire gains.”

Michael Pompian, CFA

S&P 500 Index

Average Equity

Investor Return

3-yrs. 5-yrs. 10-yrs. 20-yrs.

-8.36% -2.19% -1.38% 8.43%

-10.38% -2.84% -1.57% 1.87%

Data through 12/31/2008

Sources of Long-Term

Performance

Stock, Fund or

Money Manager

Selection

5-10%

Asset Allocation

90-95%

Portfolio Rebalancing Makes a Big

Difference

The Root of the Problem

It all started with the housing bubble

We have about 1.5 million too many homes

This is about 12 months worth of sales

Much of the problem is regionally based

A dramatic slowdown in building and an increase in housing affordability is what eventually will solve the problem.

HEADLINE:

Lou Dobbs Hosts Moneyline

From Window Ledge

Source: www.theonion.com

Relevant

Economic/Financial Issues

1. Energy Issues

2. Interest Rates

3. Domestic Politics

4. Valuation Levels

5. Investing Demographics

Energy Issues

Oil & Gas Prices will remain stubbornly

high

Demand Strong – Especially China and

India

Daily World demand dropped from 86

million to 81 million barrels in the past year.

Supply Weak –

Increasing reserve “decline rates”

Shortage of new prospects

New Refineries?

NIMBY

BANANA

NOPE

Pricing: Oil vs. Natural Gas

A barrel of oil usually sells at about 8 times an mcf of natural gas. That ratio is now 20 times. Either oil prices are too high or natural gas prices are too low.

The past weakness in energy prices is causing a big decrease in drilling plans and lays the groundwork for future price spikes.

There seems to be an inverse relationship between oil prices and world peace.

Gulf Coast Wetlands

Of Critical Importance:

1/3 of the nation’s energy production

Bulk of Country’s refining capacity

30% of America’s Seafood

South Louisiana is the

Nation’s largest port

Wetlands are a buffer against storms

The Yield Curve As Prophet

Fall 2000

3 month 6.00% 10 year 5.70%

Slope -30 basis points

Predicting a sharp decline in corporate earnings.

Summer 2003

3 month

Slope

0.95% 10 year

+340 basis points

4.35%

Predicting a huge increase in corporate earnings growth.

Summer 2006

3 month

Slope

5.10%

-60 basis points

10 year 4.50%

Projected an end to double digit EPS growth.

Important Yield Curve Spreads

Current Slope +335 Basis Points

Ten year treasury note (3.50%) minus

3-month treasury bill (0.15%)

Consumer Confidence Vs. Reality

The 1982 recession was the worst since the Great Depression. Consumer confidence is now 20% below the level it was back then.

Unemployment

Inflation

Ten-yr. USTN

1982

11.0%

+10.0%

14.0%

Now

9.7%

+ 2.0%

3.50%

Typical Recovery

Painful Layoffs

Credit Markets Gradually Thaw

Merger and Acquisition Activity Heats

Up

Newly Streamline Companies. Small

Improvement in Business Brings Much

Larger Improvement in Profits

Political Performance

Standard & Poor’s 500

+83%

+99%

-26%

-6%

Bush’s First Term

Bush’s Second Term

+26%

Stock Market and Business Cycle

Many stocks are cyclical in nature.

They tend to perform better in specific stages of business cycles. Forecasting these cycles can help to put you in the right stocks at the right time.

Consumer Staples

Excel

Source: Fortune Magazine: 3/21/94

HEADLINE:

‘Wheel of Fortune’ Contestants Hit

Hard as Vowel Prices Skyrocket

Worker Blues

THE BAD NEWS: 40% of the Country’s

skilled workers will be eligible for retirement in 2010.

THE GOOD NEWS?: Thanks to

declining 401K accounts most everyone will keep coming to work.

PERHAPS consider a “sabbatical”

Federal Reserve

Valuation Model

EPS for S&P 500

Price of S&P 500

=

Yield on 10 Year

Treasury Note

$50.00*

10025.00

=

4.85%

The 10 yr. Treasury Currently Yields 3.50%

*

Forecasted 12 month EPS.

9/09/09

Fear Index

In February of 2009 Gold sold at $1000 an ounce and could then be exchanged for some pretty useful stuff.

-150 shares of General Electric or 25 barrels of oil

-Today an ounce of gold could be exchanged for 67 shares of General

Electric or 13 barrels of oil.

HEADLINE:

Mason-Dixon Line Renamed

IHOP-Waffle House Line

Source: www.theonion.com

“Tis Double Death To Drown In Ken of Shore”

-Shakespeare

-

Twelve other Bear Markets since 1955

-Average decline was 22% and lasted 11 months

-These were followed by recoveries averaging 12-month in length and producing 35.0% returns.

-This is about 1.5 times the decline

-There are Trillions of investable dollars waiting on the sidelines.

Investing Demographics

“The Pig and the Python”

Very high birth rates from 1946 – 1964

Investing Concepts

- Financial Services

- Healthcare

- Leisure

What Drives A Stock?

Price

Earnings Per Share = P/E ratio

Using Home Depot for Example:

$27.50

$1.45 = 19.0x

08/12/09

Wal-Mart 2001-2006

Wal-Mart Stock

P/E’s vs. Earnings Per Share

2007 $43.00

$ 3.30

= A PE of 13.0x

2001 $43.00

$ 1.50

= A PE of 29.0x

The stock has remained flat as EPS growth has mirrored the decline in its PE ratio.

In 2001 Wal-Mart shares were “ahead of themselves”.

Three Stages of a

Bear Market

Stage

1. DENIAL

2. REALITY

Characteristics

Economy shows signs of slowing and stocks fall from their highs, sometimes sharply.

Investors shrug it off and act as though the bull market will last forever.

Stocks continue to decline. Investors start to realize how weak the economy really is.

3. SURRENDER Fear of deeper losses and a recession become so worrisome that investors give up on stocks, setting the stage for a rebound.

Started In Economic

Downturns

Procter & Gamble:

General Electric:

The Panic of 1837

The Panic of 1837

General Motors:

the Panic of 1907

United Technologies: The Great Depression

1929

Fed Ex:

The Oil Crisis of 1973

Microsoft:

1973 – 1974 Recession

GNP vs. Stock Market Valuation

The Future Has Not Been Cancelled

Our economic problems are not

insurmountable.

Have patience, this turnaround will not

happen overnight.

The stock market is about 6-9 months

ahead of the economy.

Capitalism Works. The human drive to

succeed is very powerful.

Great Reading/Sources

Popular Books

One Up On Wall Street, Peter Lynch (Simon & Schuster)

A Zebra in Lion Country, Ralph Wanger (Simon & Schuster)

The Money Masters, John Train (Harper & Row)

The Little Book That Beats The Market, Joel Greenblatt

Analytical Books

The Intelligent Investor, Benjamin Graham (Harper & Row)

Security Analysis, Benjamin Graham (McGraw-Hill)

Sophisticated and Well Written

Common Stocks and Uncommon Profits, Phillip A. Fisher (Harper &

Row)

The Contrarian Investment Strategy, David Dremen (Random House)

Great Investment Websites

Bloomberg.com

Investopedia.com

MotleyFool.com

Seekingalpha.com

NPR.org (Planet Money)

YahooFinance.com

www.burkenroad.org

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