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SEATTLE | 206.622.3700 LOS ANGELES | 310.297.1777 www.wurts.com

10am PST

July 24, 2012

QUARTERLY RESEARCH CONFERENCE CALL

June 2012 Quarterly Research Conference Call

Dial in: (888) 290-7503 US(201) 604-5105 International

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Introduction by: Jeffrey MacLean, Chief Executive Officer

Presented by:Jeffrey Scott, CFA, Chief Investment OfficerScott Day, CFA, Director Fixed IncomePeter Wilamoski, PhD, Director of Capital Markets Research

Jeffrey J. MacLeanPresident, CEO

Jeffrey Scott, CFA

CIO

Scott Day, CFA

Director of Fixed Income

Peter Wilamoski, Ph.D.

Director ofCapital Markets Research

2

3

T H E P E R C E I V E D P R O B L E M : G D P G R O W T H

The Peak in Growth

Sources: BEA, Eurostat, IBGE, Bloomberg, Wurts

World GDP GrowthThe Peak in Growth

US ChinaEurope Brazil

1

0

1000

2000

3000

4000

Jan‐05

May‐05

Sep‐05

Jan‐06

May‐06

Sep‐06

Jan‐07

May‐07

Sep‐07

Jan‐08

May‐08

Sep‐08

Jan‐09

May‐09

Sep‐09

Jan‐10

May‐10

Sep‐10

Jan‐11

May‐11

Sep‐11

Jan‐12

Billion

s of D

ollars

Period of Monetary Stimulation Federal ReserveECB PBoC

Phase 1 Phase 2

Sources: Federal Reserve, ECB, Bank of Japan, Bank of England, People’s Bank of China, Bloomberg, Wurts

Central Banks Balance Sheets3

Central Banks Policy Response

Sources: Federal Reserve, ECB, Banco Central do Brasil, The Peoples Bank of China, Bloomberg, Wurts

Fed Funds Target RateECB Main Refinancing RateChina Rediscount RateBrazil Selic Target Rate

2

Phase 1 Phase 2

‐10%

‐5%

0%

5%

10%

‐30%

‐20%

‐10%

0%

10%

20%

30%

Mar‐05

Sep‐05

Mar‐06

Sep‐06

Mar‐07

Sep‐07

Mar‐08

Sep‐08

Mar‐09

Sep‐09

Mar‐10

Sep‐10

Mar‐11

Sep‐11

Mar‐12

Qua

rterly GDP

Qua

rterly Returns

Periods of Monetary Stimulation Russell 3000 (Left)High Yield (Left) US GDP (Right)

QE Impact on GDP, Equities, & Spreads

Sources: Bloomberg, Wurts

4

‐0.05 ‐0.03 ‐0.01 0.01 0.03 0.05 0.07 0.09 0.11Deflation/Default Austerity Inflation Hyper-InflationGrowth & Prosperity

Fed Objective

L E T ’ S P U T T H E P R O B L E M S I N P E R S P E C T I V E

4

5

T H E R E A L P R O B L E M : L A C K O F P E R S O N A L I N C O M E G R O W T H

US Personal Income

Sources: Bureau of Labor Statistics, Bureau of Economic Analysis, Bloomberg, Wurts

US Average Hourly Earnings YoY SAUS Personal Income YoY SA

Job Losses Across Business Cycles

Sources: Source calculatedriskblog.com

“Knock it off, fellas… you’re scaring me!”

5

6

6

T H E R E A L P R O B L E M : T H E L A C K O F C R E D I T G R O W T H

Source: Bureau of Economic Analysis, Federal Reserve Board, Wurts

‐$0.5

$0.0

$0.5

$1.0

$1.5

$2.0

$2.5

$3.0

$3.5

$4.0

$4.5

Increase in U.S. Debt Per $1 Increase in GDP8

7

154%

299%

132%

382%

100%

150%

200%

250%

300%

350%

400%

Total Credit M

arket D

ebt a

s % of G

DP

Debt Bubble

Debt Bubble

2007 Stock

Market Top1929

Stock Market

Top

2011Debt: $54

TrillionGDP: $15

Trillion

70 Years

Sources: Before 1945: US Census Net Public and Private Debt; After 1945: Federal Reserve Board, Flow of Funds, Wurts

Total Credit Market Debt As % of U.S. GDP7

‐10%

‐5%

0%

5%

10%

15%

20%

$0.00

$0.10

$0.20

$0.30

$0.40

$0.50

$0.60

$0.70

$0.80

CPI Inflatio

n (2 Year R

ollin

g Av

erage)

$1 of N

ew Deb

t Impa

ct on GDP

Sources: < 1945: US Census Net Public and Private Debt; > 1945: Federal, Flow of Funds, Bureau of Labor Statistics, Wurts

$1 of New Debt Impact on US GDP with Inflation

$1 of New Debt Impact on GDPCPI YoY (2 Year Rolling Average)

9

H E A D W I N D S T O G D P

7

Sources: CBO, CIRA, US EconomicsSource: IMF, Bloomberg, Wurts

US Government Debt-to-GDPBillions of Dollars

Percent of GDP

Bush Tax Cuts‐Top Two Tax Brackets $55 0.4%

Bush Tax Cuts‐Other Measures 195 1.3

99‐Week Unemployment Insurance Benefits 50 0.3

2% Payroll Tax Cut 110 0.7

3.8% Medicare Tax on Investment Income 20 0.1

BCA Sequester 95 0.6

Total Fiscal Contraction $525 3.4%

January 2013 Expiring Fiscal Measures

Source: Bianco Analytics

The Debt Ceiling10

11 12

‐0.05 ‐0.03 ‐0.01 0.01 0.03 0.05 0.07 0.09 0.11Deflation/Default Austerity Inflation Hyper-Inflation

T H E P E R S P E C T I V E H A S C H A N G E D A B I T

Growth & Prosperity

Fed Objective

8

W E A R E N O T A L O N E – E U R O P E ’ S P R O B L E M S C O N T I N U E

9

Mon

ey Sup

ply Growth YoY

ECB Ra

te/G

ov’t Expe

nditu

re % GDP

Sources: Eurostat, ECB, Bloomberg, Wurts

GermanyFrancePortugalGreece

European GDP – Core vs. Periphery

European Sovereign Debt to GDP

Sources: IMF, Bloomberg, Wurts

ItalySpainPortugalIrelandGreece

13

14

Sources: Eurostat, ECB, Bloomberg, Wurts

ECB Main Refinancing RateECB M2 Money Supply YoYGov’t Expenditure Contribution to GDP

European Austerity in Action15

W E A R E N O T A L O N E – E U R O P E ’ S P R O B L E M S C O N T I N U E

10


PIIGS Funding Costs1st LTROItaly

SpainPortugalIreland

7% Threshold

Source: Zerohedge.com

Sources: Thomson Reuters, Bank of Spain

Austerity in Action – Spain Example17

16

T H E E U R O S U M M I T S T A T E M E N T . W H A T D I D T H E Y S A Y ?

11

From the 18th Euro Summit, this “game changer” (italics added):“We affirm that it is imperative to break the vicious circle between banks and sovereigns. The Commission will presentProposals on the basis of Article 127(6) for a single supervisory mechanism shortly. (Read: No agreement yet) We ask theCouncil to consider these Proposals as a matter of urgency by the end of 2012 (Consider? How about approve? End of 2012?How about end of July?). When an effective single supervisory mechanism is established, involving the ECB, for banks in theeuro area the ESM could, following a regular decision, have the possibility to recapitalize banks directly. (Read: Nothingconcrete) This would rely on appropriate conditionality, including compliance with state aid rules, which should be institutionspecific, sector‐specific or economy‐wide and would be formalised in a Memorandum of Understanding. The Eurogroup willexamine the situation of the Irish financial sector with the view of further improving the sustainability of the well‐performingadjustment programme. Similar cases will be treated equally.”“We urge the rapid conclusion of the Memorandum ofUnderstanding attached to the financial support to Spain forrecapitalisation of its banking sector. We reaffirm that the financialassistance will be provided by the EFSF until the ESM becomesavailable (Read: still does not exist), and that it will then betransferred to the ESM, without gaining seniority status. We affirmour strong commitment to do what is necessary to ensure thefinancial stability of the euro area, in particular by using the existingEFSF/ESM instruments in a flexible and efficient manner in order tostabilise markets for Member States respecting their CountrySpecific Recommendations and their other commitments includingtheir respective timelines, under the European Semester, theStability and Growth Pact and the Macroeconomic ImbalancesProcedure. These conditions should be reflected in a Memorandumof Understanding. We welcome that the ECB has agreed to serve asan agent to EFSF/ESM in conducting market operations in aneffective and efficient manner. We task the Eurogroup toimplement these decisions by 9 July 2012.”

T H E F I N A L F R O N T I E R - E M E R G I N G M A R K E T S

12

EM Central Banks have Room to Run

Sources: Banco Central do Brasil, The Peoples Bank of China, Central Bank of Russia, Bloomberg, Wurts

Emerging Market GDP Growth

Brazil GDP YoYChina GDP YoYRussia GDP YoYIndia GDP YoY

Source: IBGE, National Bureau of Statistics of China, Federal Service of State Statistics, Bloomberg, Wurts

The Peak in Growth

Brazil GDP YoYChina GDP YoYRussia GDP YoYIndia GDP YoY

Brazil Selic Target RateChina Rediscount RateRussia Refinance Rate

19 20

Inflation No longer a Concern

Sources: IBGE, China Economic Information Network, Federal Service of State Statistics, Bloomberg, Wurts

18

Brazil CPI YoYChina CPI YoYRussia CPI YoY

U S E Q U I T Y M A R K E T S V A L U A T I O N

13

Dividend Yield Standard Deviation (SD)


Price to Book and Standard Deviation (SD)


0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

S&P 500 Div. Yield +/‐ 1 SD +/‐ 2 SD +/‐ 3 SD Average

Rich Ch

eap

0.5

1.5

2.5

3.5

4.5

5.5

6.5

7.5

S&P 500 P/B +/‐ 1 SD +/‐ 2 SD +/‐ 3 SD Average

Cheap Rich

P/E and Standard Deviation (SD)


8

13

18

23

28

33

S&P 500 P/E +/‐ 1 SD +/‐ 2 SD +/‐ 3 SD Average

Cheap Rich

21

2322

E U R O P E A N M A R K E T S V A L U A T I O N

14





0.5%

1.5%

2.5%

3.5%

4.5%

5.5%

6.5%

MSCI EAFE Div. Yield +/‐ 1 SD +/‐ 2 SD +/‐ 3 SD Average

Rich Ch

eap

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

MSCI EAFE P/B +/‐ 1 SD +/‐ 2 SD +/‐ 3 SD Average

Cheap Rich



0

10

20

30

40

50

60

MSCI EAFE P/E +/‐ 1 SD +/‐ 2 SD +/‐ 3 SD Average

Cheap Rich

24

2625

E M E R G I N G M A R K E T S V A L U A T I O N

15





0.5%

1.5%

2.5%

3.5%

4.5%

5.5%

6.5%

MSCI EM Div. Yield +/‐ 1 SD +/‐ 2 SD +/‐ 3 SD Average

Rich Ch

eap

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

MSCI EM P/B +/‐ 1 SD +/‐ 2 SD +/‐ 3 SD Average

Cheap Rich

29



0

5

10

15

20

25

30

35

40

45

MSCI EM P/E +/‐ 1 SD +/‐ 2 SD +/‐ 3 SD Average

Cheap Rich

27

28

F I X E D I N C O M E

Source: Barclays Capital, Bloomberg, Wurts

Credit Spread Markets – OAS Spread

Spreads off lows, but are rich/fair value

Rich

Cheap

16

Credit Spread Markets –Yield to Worst

Yields are at or near all time lows

Source: Barclays Capital, Bloomberg, Wurts

Investment Grade CorporateHigh YieldEmerging Market

Source: Bloomberg, Wurts

Developed Interest Rates (10 Year)

US JapanUK Germany

0.8%

1.6% 1.6% 1.7%

2.7%

1.7%

5.8%

3.1%3.8%

5.4%

0%

1%

2%

3%

4%

5%

6%

7%

Japan

Germany

United

States

Canada

France UK

Italy

Barclays

US Cred

it

Barclays

Global…

EMBI‐

Global

Global Sovereign 10 Year Index Yields (June ‘12)

Source: Bloomberg , JP Morgan, Wurts

30 31

3332

Investment Grade CorporateHigh YieldEmerging Market

W H A T A R E Y O U I N T H E M O O D T O W A T C H ?T V E D I T I O N

17

That ‘70s Show

Premiere

Will & Grace Premiere

The King of Queens Premiere

Era of Reality TV…You’re Fired!Era of Sitcom TV…Wanna Laugh?


Friends Premiere

Everybody Loves

Raymond Premiere

Roseanne Premiere

Cosby Show Premiere

Seinfeld Premiere

Survivor Premiere

Big Brother Premiere

The Amazing Race

Premiere

Fear FactorPremiere

American IdolPremiere

Dancing with The StarsPremiere

The ApprenticePremiere

America’s Got TalentPremiere

S&P 500 Price Level

W H A T A R E Y O U I N T H E M O O D T O W A T C H ?M O V I E E D I T I O N

18

Film Noir

Double Indemnity (1944)Notorious (1946)The Postman Always Rings Twice (1946)The Third Man (1949)

HellraiserDead of WinterThe Lost Boys

Shrek 2

Toy Story 3The Ring

The Blair Witch Project Saw I - 7Horror/Torture


Dracula (1931) Dr. Jekyll and Mr. Hyde (1932)Frankenstein (1931) Public Enemy (1931)The Mummy (1932)Scarface: The Shame of Nation (1931)The Invisible Man (1933)

Horror

Night of the Living Dead (1968)The Exorcist (1973)Jaws (1975)Poseidon Adventure (1972)

Horror Disaster

101 Dalmatians

Mary Poppins

Aladdin

Beauty & The Beast

The Lion King

Toy Story

Back to the Future

S&P 500 Price Level

M A C R O E C O N O M I C & M A R K E T O V E R V I E W

19

Factors to watch over coming quarters (from December 2011 & March 2012 QRR) What is the developed economies and financial markets’ reaction as the central banks pause from further QE? Economic growth and inflation in the developed economies are dependent upon wage and credit growth.

Job and credit growth have been slowing and inflation is trending lower. How will the US handle the headwinds of the debt ceiling limits and changes in fiscal policy? Will emerging markets’ growth rebound following the accommodation of the central banks?

Current macroeconomic environment Despite trillions in monetary stimulus, the economic impact for the developed economies’ GDP growth has been minimal. The lack of job/wage and credit growth constrained economic growth and limited potential inflationary pressures. The U.S. economy faces several headwinds in 2013 including the debt ceiling, fiscal cutbacks, and a growing interest rate cost. Europe implemented austerity in response to the debt problems, however, the Debt/GDP is too large for such measures to be

effective. Debt funding costs continue to increase for the PIIGS.

Emerging market growth continues to trend lower despite central bank accommodation, however, emerging markets do notface the same debt concerns as the developed economies.

Valuation & Portfolio Recommendations Assuming growth remains near current estimates:

US and EM equities are slightly cheap while European equities are cheap Interest rates are slightly rich Spreads are fair to rich

Slight increase in overall portfolio risk, but it is still underweight relative to policy Slight increase in equity risk (developed ex‐US) Slight decreases in both developed market interest rate risk (US and Developed ex‐US) and credit risk

Q & A Session

Thank you for participating in our Second Quarter 2012 Quarterly Research Conference Call. We are now open for questions. Questions can be asked through the chat feature or by pressing *1 if you are dialed into the conference.

Dial in:

(888) 290-7503

Participant code:

81460974

20

new quarterly research conference call 10am pst · 2016. 10. 25. · seattle | 206.622.3700 los...

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