Uncertainty brings OpportunIty

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Uncertainty brings OpportunIty
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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.
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The Facts

• We are not entering another Great Depression.
  In the 1930s government raised taxes and
  increased interest rates. Were now doing just
  the opposite.
• Valuations appear especially attractive today.
  The markets are down to 1997 levels and a large
  number of companies are selling at significant
  discounts to their true worth.
• 9 Trillion in cash ready to invest.

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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.
• Weve had two recessions in the last 25 years
  (early 1990s and 2000 2001).
• They always end and the economy always rises to a
  higher plateau.

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Stimulating Enough?
Spring 2008 170 Billion Tax Rebates Fall
2008 350 Billion Drop in gas prices Proposed
2009 790 Billion Economic Stimulus Plan
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Changes Afoot?

• Repealing the Repeal of Glass Steagall
• Reinstate Trust Laws an end to too big to
  fail.
• Re-instatement of the Uptick Rule

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Solving the Financial Crisis

• Were doing all the right things.
• Stronger firms buying out weaker firms.
• Firms are fessing up to valuations and losses.
  
• Fed cutting interest rates.

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The Feds Game of Whack- A-Mole

• The Fed bailed out the mortgage mess, but..
• This easy money created other bubbles
• -Commodities
• -Currencies
• What will further easing create?
• Quote from Yardeni Associates

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Since World War II

• Weve 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

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Darts vs. Professional Stock Pickers
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Oil Wells
Often Overlooked Oil
Oil
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Dreco Energy Services Price Graph
31 May 26June 26th July
23rd Aug 20th Sept. 19th
Oct. 15th Nov 29Nov
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Hang In There
Over the past 30 years the stock market has
produced an average annual rate of return around
8. If you were out of the market during the
best 30 months your return would drop to just 2.
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Sources of Long-Term Performance
Portfolio Rebalancing Makes a Big Difference
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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.

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HEADLINE
Lou Dobbs Hosts Moneyline From Window Ledge
Source www.theonion.com
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Relevant Economic/Financial Issues

1. Energy Issues
2. Interest Rates
3. Domestic Politics
4. Valuation Levels
5. Investing Demographics

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Gulf Coast Wetlands

• Of Critical Importance
• 1/3 of the nations energy production
• Bulk of Countrys refining capacity
• 30 of Americas Seafood
• South Louisiana is the Nations largest port
• Wetlands are a buffer against storms

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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 0.95 10 year 4.35
• Slope 340 basis points
• Predicting a huge increase in corporate earnings
  growth.
• Summer 2006
• 3 month 5.10 10 year 4.50
• Slope -60 basis points
• Projected an end to double digit EPS growth.

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Important Yield Curve Spreads
Current Slope 310 Basis Points Ten year treasury
note (3.30) minus 3-month treasury bill
(0.20)
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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.
• 1982 Now
• Unemployment 11.0 8.9
• Inflation 10.0 2.0
• Ten-yr. USTN 14.0 3.3

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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

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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
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HEADLINE
Wheel of Fortune Contestants Hit Hard as Vowel
Prices Skyrocket
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Federal Reserve Valuation Model
EPS for SP 500
Yield on 10 Year Treasury Note

Price of SP 500
50.00

5.55
900.00
The 10 yr. Treasury Currently Yields 3.30
Forecasted 12 month EPS. 5/11/09
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Federal Reserve Model
Source Yardeni Associates
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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 Gold prices have
dropped to 911 an ounce and could only buy 63
shares of General Electric or 15 barrels of oil.

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HEADLINE
Mason-Dixon Line Renamed IHOP-Waffle House Line
Source www.theonion.com
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Tis Double Death To Drown In Ken of
Shore-Shakespeare

• -Twelve other Bear Markets since 1955
• -Average decline was 22.5 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

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Investing Demographics

• The Pig and the Python
• Very high birth rates from 1946 1964
• Investing Concepts
• - Financial Services
• - Healthcare
• - Leisure

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Important Issues

• Favorable Demographics
• Troubles in the Housing Market
• Changes to Pension Plans

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Source Standard Poors
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What Drives A Stock?
Price Earnings Per Share P/E
ratio Using Home Depot for Example
22.00 1.85 12.0x
12/02/08
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Wal-Mart 2001-2006
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Wal-Mart StockP/Es vs. Earnings Per Share
2007 43.00 A PE of 13.0x
3.30 2001 43.00 A PE of 29.0x
1.50 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.
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Three Stages of a Bear Market
Stage Characteristics
1. DENIAL 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.
2. REALITY 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.
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Started In Economic Downturns

• Procter Gamble The Panic of 1837
• IBM The Long Depression
• 1873 - 1896
• General Electric The Panic of 1837
• General Motors the Panic of 1907
• United Technologies The Great Depression
• 1929
• Fed Ex The Oil Crisis of 1973

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GNP vs. Stock Market Valuation
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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.

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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 Inv
estopedia.com NPR.org MotleyFool.com Seekingalpha.
com YahooFinance.com
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www.burkenroad.org