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Assessment and Forecast for the Global Capital Markets

May 1, 2013

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The information provided herein has been prepared solely for informational purposes and is not an offer to buy or sell or a solicitation of an offer to buy or sell the securities or instruments mentioned or to participate in any particular trading strategy. This information is based on or derived from information generally available to the public from sources believed to be reliable. No representation or warranty can be given with respect to the accuracy or completeness of the information, or with respect to the terms of any future offer or transactions conforming to the terms hereof. Any statements made represent the view of the author and do not necessarily represent the view of VCU or the VCU School of Business.

This report does not provide individually tailored investment advice. It has been prepared without regard to the circumstances and objectives of those who receive it. It is recommended that investors independently evaluate particular investments and strategies and seek a financial adviser's advice.

The appropriateness of an investment or strategy will depend on an investor's circumstances and objectives. The value of and income from your investments may vary because of changes in interest rates or foreign exchange rates, securities prices or market indexes, operational or financial conditions of companies or other factors. Past performance is not necessarily a guide to future performance. Estimates of future performance are based on assumptions that may not be realized. 

Legal And Compliance

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Topics

• The Macro Backdrop

• The Policy Response

• This Years Possible ‘Game Changer’

• Forecast for 2013

• Q&A

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The Global Economy

• Global Debt levels are at all time highs and Sovereign debt and deficits continue to grow

• US Growth has stalled at around 2%

•China is slowing

• Europe is heading into recession

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Global Growth Slowing

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Dropping Like A Ton of BRIC’s

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Brazil Decelerating

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India Moderating

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China Slowing

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No Help From Europe

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When “PIGS” Can’t Fly

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Portugal In Recession

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Italy in Recession

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Greece in Recession

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Spain In Recession

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No Problem, Core Europe is Still Strong

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Core Europe Feeling the Decay

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France: Joining the Club

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Germany Feeling the Drag

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USA: Winner, By a Nose

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US: No ‘V’ Shaped recovery

?

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A Lost Decade in Japan

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Macro Summary: C Minus at Best

• Europe In Recession

• BRIC’s Slowing

• US Growth Tenuous

• Massive Debt Overhang

•Conclusion: Buy Stocks (Huh??)

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A Brief Sidebar

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The Wealth Effect

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Housing: Signs of Life

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Consumers More Confident

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The Deleveraging Myth

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2008 2009

2012

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The Pause That Refreshes

Source: FED

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Low Rates Drive Increased Borrowing

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Wealth: Now You See it, Now You don’t

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You Are Here

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Summary:

• Consumption drives economic growth

• Consumers have not deleveraged • Consumer spending may be unsustainable

• Wealth Effect may be fleeting

• Conclusion: Buy Stocks

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Bull Case For US Stocks Based on Fundamentals : In a nutshell

• The US economy has stabilized and is growing again

• Corporate profits are strong and growing

• Corporate balance sheets are cash rich

• Dividend Yields are attractive

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Shiller CAPE Still Not Cheap

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Are Margins Sustainable?

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Cost Pressures Rising

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Summary:

• Equity valuations are not terribly cheap• Sluggish economy translates into anemic

Revenue growth• Profit Margins may be peaking• Earning may even decline on a YOY basis• The Stock Market is at an all time high• Conclusion: Buy Stocks

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A Different Take on Things

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Paradigm Shift: The Rise of the Monetary Authority Superpowers

FED BOE

ECB BOJ

IMF BOC

World Bank EMF

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What are the Central Banks thinking?

• The Global Economy is ‘Too Big To Fail’

• Lessons learned from the US financial crisis

• The US experience was not a leverage problem, it was a liquidity problem

• Act faster, act ‘bigger’

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Keep Rowing, Keep Printing

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What The Central Banks Are Saying

• Fed Announces QE-Infinity - Indefinite Bond Buying to Spur Growth

• Volatility Slumps as ECB Announces New QE

• Bank of Japan Announces Unlimited Easing, 2% Inflation Target

• Bank of England To Increase Quantitative Easing (QE) This Week

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FED Balance Sheet

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The Printing Presses Will Keep Running

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Declining Rates Drive Liquidity Bubble

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Total World Debt

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Waves Of Liquidity

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Investment Thesis

• The Global economy is a closed loop system

• Any liquidity injected into the system remains there and must find a place to go until it is removed

• What is the end-game?

• The question to ask is: Where does the money go next?

• Recommendation: Buy Stocks

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Major Risk To This Outlook is a Change in Central Bank Policies

• Probability: Unlikely

• The FED CANNOT raise rates for the next 2-3 years

• The FED CANNOT start unwinding it’s asset purchases

• Quantitative easing by the Central Banks will continue and in fact, will accelerate

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“Fed Ties Rates to Joblessness, With Target of 6.5%”

US Unemployment Rate: Source BLS

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FED Targets 2.5% PCE

2.5%

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The Most Important “Election” In our Lifetime!*

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Happy Birthday FED!: 1913 – 2013

100 Years old and still growing strong!

1979-1987 1987-2006 2006-2014

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The Candidates

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Timeline

• President Obama likely will start floating names out as trial balloons in the late Spring

• A final nomination will occur over the Summer so that the Confirmation process can begin

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Risks

• If the Candidate is perceived to be willing to make ANY changes to the current FED policy the markets will react negatively

• If the Confirmation process becomes contentious (like the recent confirmation of the new Defense Secretary) the market may correct due to uncertainty of policy direction

My Bet:

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April 2012 Forecasts

• Bonds are the worst risk reward trade-off at these levels

• Equities offer the best risk/reward over the next 2-3 years

• Cash carries no principal risk but is guaranteed to lose at least • 2% per year purchasing power from inflation.

-Barclays Agg: 2.9% -High Yield: 11.68%

-S&P 500: 11.76%

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March 2013 Forecast: No Change

• Overweight Equities in a balanced portfolio

• Underweight Bonds

• What to Watch Out For

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Watch The FED

in June, 2007, the Fed announced that it would likely stop raising interest rates for a period, and in fact, may begin cutting soon.

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Watch The Technical's

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Outlook: Bullish,

For All The Wrong Reasons

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Don’t Worry, Be Happy!

*Global Debt

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Thank You

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Q & A

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