broyhill mid year outlook (jun-10)

8/9/2019 Broyhill Mid Year Outlook (Jun-10)

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Mid YearInvestment Strategy


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Mid Year Outlook Conference Call

Conference Dial-In Number: (218) 339-3600

Participant Access Code: 722682#

Conference Playback Number: (218) 339-3699

Access Code: 722682#

Wednesday, June 30th, 2010

The call will begin promptly at 11:00AM EDT


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EconomicOutlook


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Consensus Already Pricing V-Shaped Recovery

Source: Hussman Funds

Economic Outlook | 4

Rose coloredglasses?


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Expectations Are Irrationally Exuberant


The economy -- supported by stimulative monetary policy and the concerted

efforts of policymakers to stabilize the financial system -- appears to be ontrack to continue to expand through this year and next.

The latest economic projections of Federal Reserve Governors and Reserve

Bank presidents anticipate that real gross domestic product (GDP) will grow

in the neighborhood of 3-1/2 percent over the course of 2010 as a whole andat a somewhat faster pace next year.

-Federal Reserve Chairman Ben Bernankes Testimony,Before the U.S. House of Representatives Budget Committee, June 9 2010


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Where Have We Heard This Before?


The impact on the broader economy and financial markets of the problems

in the subprime market seems likely to be contained.

-Federal Reserve Chairman Ben Bernanke

Testimony to Joint Economic Committee, March 2007

The U.S. economy appears likely to expand at a moderate pace over the

second half of 2007, with growth then strengthening a bit in 2008 to a rateclose to the economys underlying trend.

-Federal Reserve Chairman Ben BernankeSemi-Annual Testimony to Congress, July 2007


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The Hostess Twinkie Recovery


Source: Saint Louis Federal Reserve

Unsustainable

deficit spending


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Leading Indicators are Rolling . . .


Source: Gluskin Sheff

Back in recessionterritory


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Rolling . . .


Source: Pragmatic Capitalism


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Rolling.


Source: Pragmatic Capitalism


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Amidst A Number of Disturbing Developments:


Second wave of mortgage resets and domestic credit strains

Eurozone contagion and sovereign debt concerns

Global credit conditions rapidly deteriorating

Consequences of Deepwater Horizon spill

Tensions between North and South Korea

German ban on short selling Australias 40% mining tax

Australia housing bubble

Chinese property bubble

European bank failures

US financial regulation

Rising correlations

Thailand riots

Flash crash?


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The Second Wave


Source: Credit Suisse

Mountain ofadjustable resets


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Problem Children


Source: Der Spiegel


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Global Markets Are Interconnected


Source: BIS Quarterly Review, June 2010


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Too Big to Bail

Source: JPMorgan

180%

83%

237%

84%101% 103%

155%

92%

594%

337%

56%

0%

100%

200%

300%

400%

500%

600%

700% Top 25 Global Banks: Total Assets to Home Country GDP


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Eurozone Liquidity


Source: Hedgeye Risk Management


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Double Trouble

Chinese Property Value/DisposableIncome Per Urban Household

Long Term Real House Prices

Source: GMO, Steve Keens Debtwatch

Is this abubble?


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InvestmentImplications


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Our Investment Process

Macro

Global Macro is critical to understanding capital markets.

Valuation

Fundamental Valuedrives long term returns.

Sentiment

Market Actioncomplements long term value.

PortfolioConstruction

Disciplined Portfolio Constructionis vital to consistent alpha.

Investment Implications | 19


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Its A Whole Different World Out There!


2009

Cash is Trash

Reflation

Rebound in LEI

Beta Outperformance

Declining Volatility

Rising Interest Rates

Steepening Yield Curve

2010

Cash is King

Deflation

Declining LEI

Quality Outperformance

Increasing Volatility

Declining Interest Rates

Flattening Yield Curve


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Investors Should Own Quality

Source: GMO 7-Year Asset Class Return Forecasts


1.9%

-0.6%

7.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

U.S. Equities (Large Cap) U.S. Equities (Small Cap) U.S. High Quality

AnnualRealReturnOver7years

Projected Annual Real Return Over 7 years

6.5% Long-TermHistorical U.S. Equity

Above averagereturns from low

risk equities.


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34.5%

15.8%

1.2%

-14.3%

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

Early Expansion Late Expansion Early Contraction Late Contraction

Annualized Equity Returns During Market-Cylce Phase (L)

EquityValuation

FirmValuation

Profitability

Beta

After a Peak in Leading Indicators . . .

Source: ISI Portfolio Strategy


You arehere!!


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While The Cycle Looks Grim.

Source: Hussman Funds


We are entering the worst twoquarters of the cycle, where

returns have been dramaticallyworse than indicated here

when starting from stretched

valuations, as we see today.


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Inflation Is Public Enemy Number One . . .

Source: Saint Louis Federal Reserve



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But Deflation Is The Greater Evil Today!

Source: ShadowStats.com


The inflationistas are focusing solely on the increasein the monetary base, which tells us nothing if

money is not moving through the system!!


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Core CPI Remains at Lowest Level Since 1966 . . .

Source: Bespoke Group


Dnde estinflation?


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Bond Yields Follow Inflation Lower . . .

Source: Hoisington Investment Management


Long term treasuryrates fell to 1.9% in 1941


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So Should Commodities . . .

Source: Gluskin Sheff


China is the second worstperforming equity market on

the planet year-to-date(between Greece and Spain).


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And Commodity Currencies.

Source: Decision Point



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Dont Discount The AlmightyBuck!!


Fiat currencies are engaged in adangerous game of competitivedevaluation. History warns that

this will not end well, but theGreenback is still the tallest

midget in the room . . . for now.


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Gold Is Not a Bubble . . . Yet!

Source: Clusterstock

389%

463%

467%

529%

665%

882%

954%

1241%

1317%

1324%

0% 200% 400% 600% 800% 1000% 1200% 1400%

Gold

Nikkei

Japan Land Prices*

Dow Transports

Hang Seng

WTI

Homebuilding Index

Bond Prices

S&P 500

Nasdaq

Prior Secular Bull Markets(Trough-to-Peak Percent Change)



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Broyhills Bottom Line


Buckle your seatbelts kids. We are headed for a bumpy ride ahead. We arepositioned accordingly, as the Great Recovery appears to be a big fat

D.U.D.D.

Double Dip in the economy and in domestic home prices as we pass thepeak effects of monetary policy and fiscal stimulus at the same time the

inventory bounce begins to fade ahead of major tax increases next year.

Unemployment is structural in nature and rises on average for five yearsfollowing systemic banking crises. The boost from census hiring is nowin the rear view mirror.

Debt levels across the private and public sectors have reached a choking

point, in which greater levels of debt act as larger and larger speed bumpsfor economic growth.

Deflation in asset prices (particularly from todays overvalued levels) isthe result of private sector deleveraging, which leads to distressed selling,a loss of confidence and a further contraction in the velocity of money.


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Contact Information

Broyhill Asset Management

800 Golfview ParkPost Office Box 500Lenoir, NC 28645

Phone: 828 758 6100Fax: 828 758 8919

For more information please contact:

Mr. Christopher R. Pavese, [email protected]

Contact Information | 33


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Disclosures

PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.

This material has been prepared solely for the purposes of illustration and discussion. Broyhill Asset Management is the marketing namefor the investment management business conducted by Broyhill Asset Management, LLC. and its affiliates. Broyhill Asset Management, LLCis an SEC Registered Investment Advisor. Private investment vehicles are offered through Broyhill Wakin General Partners LLC, SuretyCapital Management LLC, and Broyhill Strategic Partners LLC, and are only offered by delivery of confidential offering memorandum andsubscription materials to eligible investors who meet certain statutory and/or regulatory criteria. Each General Partner is a separate legalentity and is affiliated with Broyhill Asset Management, LLC through common ownership and control.

Under no circumstances should the information contained herein be used or considered as an offer to sell, or solicitation of an offer to buyany security. Any security offering is subject to certain investor eligibility criteria as detailed in the applicable offering documents. The

information contained herein is confidential and may not be reproduced or circulated in whole or in part. The information is in summaryform for convenience of presentation, it is not complete and should not be relied upon as such.

Any information, data, statement, opinions, or projections made herein may contain certain forward looking statements, projections, andinformation that are based on the beliefs of Broyhill Asset Management as well as assumptions made by, and information currently availableto, Broyhill Asset Management. Such statements reflect the view of Broyhill Asset Management with respect to future events and are subjectto certain risks, uncertainties and assumptions (including, but not limited to, changes in general economic and business conditions, interestrate and securities market fluctuations, competition from within and without the investment industry, new products and services in theinvestment industry, changes in customer profiles, and changes in laws and regulations applicable to Broyhill Asset Management). Shouldone or more of these other risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may varymaterially from those described herein.

All information, including performance information, has been prepared in good faith; there are no representations or warranty expresses orimplied, as to the accuracy or completeness, of the information, and nothing herein shall be relied upon as a promise or representation as tothe past or future performance. This material may include information that is based, in part or in full, on hypothetical assumptions, models,and/or other analysis (which may not necessarily be described herein), no representations or warranty is made as to the reasonableness ofany such assumptions, models, or analysis. The information set forth herein was gathered from various sources which are believed, but notguaranteed, to be reliable. Unless stated otherwise, any opinions expressed herein are current as of the date hereof and are subject to changeat any time. Accordingly, neither Broyhill Asset Management not its principals or affiliates make any representations as to the timeliness ofany information in this presentation.

Disclosures| 34

broyhill mid year outlook (jun-10)

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