Monthly Market Review
“What We Like Right Now”
March 15, 2012
Kevin M. Wilson, ChFC, PhD
President/CEO/CIO
1314 E. Superior Street
Suite 2
Duluth, MN 55805
Dheenu Sivalingam, MBA
AVP/CCO/Senior Analyst
Ted A. Pavlovich, WMS
VP Wealth Management
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Office: 218-464-4399
Toll Free: 877-327-5062
Fax: 218-464-4397
Email: info@bluewater-cap.com
www.bluewatercapitaladvisors.com
INTRODUCTION
TED A. PAVLOVICH
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“We live in what most business commentators
call a volatile world. I would argue that when
an environment is continuously unstable, it is no
longer volatile. Rather, we have entered a new
economic era. It could remain this way for a
long time….” - Jeff Immelt, head of GE, the
largest US conglomerate, in his annual letter to
shareholders. This is the quote of the year or
possibly the decade.
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MONTHLY SITUATION REPORT
TED A. PAVLOVICH
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Slow-Motion Bank Run In Europe
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ECB’s LTRO Program Has Provided Liquidity
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European Recession Has Begun, Raising
The Risk of Contagion
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China’s Economy Slowing Rapidly
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Downward Unemployment Trend May Reverse
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Gov’t. Unemployment Data Not Confirmed By Tax Rolls?
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Changes To Tax Code Will Affect Income Investors
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HIGH QUALITY STOCKS
DHEENU V. SIVALINGAM
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The Case for Quality
“You can’t make a silk purse out of a sow’s ear.”
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How do you define "quality" stocks?
Quality companies as those with high and stable profitability, and low
debt. These companies are able to maintain high levels of profitability
over longer time periods than the market in general, thus mitigating the
tendency for profits to regress to mean levels.
Low leverage
High profitability/High profit margin
Low earnings volatility
Lower Beta
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The Seven Immutable Laws of Investing (GMO)
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Always insist on a margin of safety
This time is never different
Be patient and wait for the fat pitch
Be contrarian
Risk is the permanent loss of capital, never a
volatility number
Be leery of leverage
Never invest in something you don’t understand
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Quality stocks have beaten out low quality
stocks over the long term
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Valuation are the primary determinant of longterm returns
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Which Portfolio Offers the Greatest Potential to
Enhance Total Return?
(BWCA’s Current Holdings
Have Avg. Quality Scores of 80)
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ENERGY & AGRICULTURAL
INDUSTRY STOCKS
KEVIN M. WILSON
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DEMOGRAPHIC THEME
Population Growth Rate
Has Been Falling…
7 Billion
But Actual Population Is
Still Rising (7 Billion)
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China and India Will Again Put a Strain on
Global Food Supplies Later in 2012-13
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Regionally (e.g., Africa, China) This
Decline Is Already Happening
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Climate Patterns Cause Problems
La Nina
El Nino
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Demand For New Crops Increasing
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Gasoline Prices Abnormally High
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Gasoline Prices Directly Related To Brent Crude Prices
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Oil Price Spikes Associated With Both Kinds of Recessions
BSR
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Real Prices Not Much Higher Than In 1918,
But Rate of Change Very Damaging
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Why High Prices: (1) Oil Prices Unstable
Due To Marginal Demand Pricing
x 2012
x 2011
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Why High Prices: (2) Middle East Security Risks Might
Change
Supply Bottleneck:
Straits of Hormuz
Source: USGS, 2003
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Why High Prices: (3) Discovery Rate Permanently Lower
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Ghawar Super-Giant Irreplacable
Source: USGS, 2003
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Projected Level Of Production/Reserves = 1.8 x Saudi Arabia’s
(In 6 Years) – Note That US Will Get 3-5 MMBOPD From Oil Shale By 2020
20 mmbo/d
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Why High Prices: (4) Global Spare Capacity
Now Falling Rapidly
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US Industry’s Response To High Prices Strong,
Yet Production Still Not Adequate
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However, More Oil Wells (Less Natural Gas Wells)
Are Being Drilled
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Sophisticated Horizontal Drilling Changed Everything
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“Fracking” Changed Everything
(Process: Set Casing, Run Cement,
Perforate, Frack, Cleanup)
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Global Natural Gas Demand Rising
Source: ExxonMobil
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Natural Gas Prices
Have Plummeted…
…But Arbitrage With EU
& Japan Will Promote
Eventual Global Market
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Shale Plays Have Tremendous Reserves Of Both Oil & Gas
Bakken
Marcellus
Regional Plays, But Each
Has Its Own “Personality,”
Especially w/Respect To
Completion Techniques
Antrim
Barnett
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Poor Shale Reservoir Quality Means Rapid Production
Declines – An Automatic Stabilizer If Firms Stop All
Drilling In Response To Low Prices
80% Initial Decline Rate
Not Really A Reservoir In Classical Sense
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INCOME-ORIENTED PLAYS
KEVIN M. WILSON
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In This Environment Dividends Are Even
More Important Than Normal
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Income Investing Has Been Useful, And Will Continue So
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SUMMARY & CONCLUSIONS
-Risk/Reward Dangerous, But Market Still Wants To Go Up Near Term
-Economic Data and Earnings Should Cause Big Doubts By Summer
-We like High Quality, Energy, Agriculture, Biotech, Dividends, Value
-If Market Sells Off, Risk/Reward Will Be VG & Huge Opportunity Awaits
KEVIN M. WILSON
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Disclaimer
This report is provided for informational purposes only and does not constitute an offer or solicitation to purchase
or sell any security or commodity and is not intended to provide specific advice or recommendations for any
individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to
investing. Any opinions expressed herein are subject to change at any time without notice. Information has been
obtained from sources believed to be reliable, for its accuracy and interpretation are not guaranteed.
Investing in securities involves risk, including possible loss of principal. Past performance should not be taken as
an indication of guarantee of future performance and no representation, express or implied, is made regarding
future performance.
The firm does not provide tax advice; clients should contact their attorney, accountant, or other tax adviser
regarding tax matters.
Blue Water Capital Advisors, LLC is an SEC registered investment advisor. Not FDIC insured. No bank guarantee.
May lose value. Not a deposit. Not insured by any federal government agency. Blue Water Capital Advisors, LLC
is not affiliated with National Bank of Commerce or NATCOM Bancshares, Inc.
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