BCIC Fall Outlook
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Transcript of BCIC Fall Outlook
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8/14/2019 BCIC Fall Outlook
1/19
Whats Next?An Outlook on Themes That Will Drive Markets
James Cullen
Portfolio Manager
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8/14/2019 BCIC Fall Outlook
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The Gruesome Twosome
US Economy Leading Rest of World Down?
Credit Contraction Balancing Deflation/Inflation
Commodities Demand, Scarcity, and Inflation
Financials Is There Any Earnings Power?
Whats Priced In?
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8/14/2019 BCIC Fall Outlook
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US Economy
Are Components for Rebound in Place? Oil Prices Have Eased from Peak
Policies in Place to Add Liquidity
Fed, Treasury Finally Seem to Grasp Problems
Or Oncoming Train at the End of Tunnel? Commodity Prices High vs. Historical Average
Home Wealth Effect Effectively Destroyed Financials Constrained, Only Plugged Losses
Rest of World Economy Generally Weakening
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What Top Executives Are Saying
Not only is the U.S. in a recession, but the rest of the world is slowing downI've never seen anything quite like it We think we're going to be relatively flatthrough 2009 and we don't see the start of a recovery... until the latter half of '09and '10And that's basically moved out a year, year and a half from whateverybody thought about four or five months ago." Alan Mulally, CEO, Ford Motor
In my 33-year career I cannot recall a more challenging environment in the foodindustry, particularly with the unprecedented cost inflation. Douglas Conant, CEO, Campbell Soup
The challenging market conditions continue and theres not yet any evidence ofthe overall housing market bottoming out... However, there are a few early signsof a market rebound in some individual markets... Ara Hovnanian, CEO, Hovnanian Enterprises
Wal-Marts customer is reflective of society in general Our customers
represent a broad income segment and they are all challenged today. Whenenergy and oil prices go up - on top of inflation and health care and core fooditems theres a great deal of pressure on the customer. Lee Scott, CEO, Wal-Mart
This is an extremely, and I stress extremely, rare event. It also speaks to themore general notion that, in today's highly disrupted financial markets, theunthinkable is thinkable.
Mohamed El-Erian, CEO, PIMCO Investments, on Lehmans Bankruptcy
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European Economy
Housing Bubble Unwinds
Huge Property Bubble in Ireland, UK, Spain
ECB At Top of Tightening Cycle Euro is Strong But Overvalued?
US Economic Weakness and Strong Euro
Hurting Exports
Economic History Might Not Repeat But it Rhymes
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European Housing Bubble
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The Global Slowdown Thesis
European Housing Bubble Bursting Could Create
US-Style Effects Across Continent
Demand Destruction Crimping Export-Dependent
BRIC Manufacturers; Slowing Growth in EmergingMarket Economies
Global Decoupling a Myth
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Credit Investment Grade
Blue Chips Face Growing Funding Costs
WSJ, Aug. 15th: Citigroup, American Express, AIG all
offered debt at 10 Yr. Treasuries + 300-475 bps.
Wells Fargo (only AAA/Aaa-rated Bank in US)Had Callable Preferred Offering @ 5 Yr. + 550 CFO Noted At Least We Have Access to Capital Markets
Lack of Liquidity Brought Down AIG
Facility from Government at LIBOR + 850
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Credit Investment Grade
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Credit - Speculative
Moodys: Defaults to Rise Substantially
Already Doubled Year-over-Year (1.4%2.7%)
Acceleration in Defaults Likely (4.9% by Y-E)
1-Yr Forecast: Only Getting Worse (7.4%) General Motors 7-day commercial paper @
5.25%, up from 4% previous day: Sept. 17th
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Credit Ratings of Portfolio Holdings
Aaa - 8.94%
Aa - 7.2%
A - 13.07%
Baa - 11.01%
Ba - 14.82%
B - 4.99%
NR - 30.91%
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Is The Commodity Bull Run Over?
Unwinding of the End of the World Trade
Crushed Many Commodity Positions
Emerging Market Demand Has Weakened
But Speed, Magnitude Says Technical Correction
Areas of Interest:
Steel, Coal, Copper, Mining Equipment
Stocks We Own:
CALM, HGT, UPL, XOM, XTO
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Financials "And if this were about a company here or there failing, I wouldn't be for
intervening in any way, shape or form. This is about our way of life, our society,our economy, the American people's jobs, their savings. This isn't about Wall
Street. That's how serious this crisis is. And while I hope it works and we want it
to work, there's no guarantees here.
House Minority Leader John Boehner, R-Ohio.
Will New RTC Save or Japan-ify Financials? Investment Bank Model Died This Weekend
Is Earnings Power Permanently Impaired?
Stocks We Own:
BAC, GS, JPM
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To Summarize
Expect the Unprecedented
US Economic Growth Got in a Fight with a Brick Wall
Credit is Oil to Economys Engine; Extremely Scarce
Europe Could Follow US into Downturn
If Europe Falls, What Supports Asia/South America?
Potential for Equity Market to Bottom
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Equity Market Bottom?
Confirming Short Seller Witch Hunt
Credit Quality Has Impact, Requires Consideration
Implied Volatility High
Liquidity State (Extremely Dry, But Fed Moving to Counteract) Corporate Buybacks
Disagreeing Panic?
Corporate Defaults (esp. Speculative) Not High Short-Lived Bear Market
Global Financial Leverage Still High
Housing Prices Need to Fall Further
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8/14/2019 BCIC Fall Outlook
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