Same Play, Same Play, Different ActorsDifferent Actors

December 12, 2005December 12, 2005

Bill LaggnerBill LaggnerKevin DuffyKevin Duffy

Bearing Asset Management, Bearing Asset Management, LLCLLC

Same Play, Different Same Play, Different ActorsActors

Source: Bearing Asset Management art department

““The only permanent truth in finance The only permanent truth in finance is that people will get bullish at the is that people will get bullish at the

top and bearish at the bottom.”top and bearish at the bottom.”

- James Grant,- James Grant, Grant’s Interest Rate ObserverGrant’s Interest Rate Observer

Same Play, Different Same Play, Different ActorsActors

Source: Bearing Asset Management

Bearing Credit Bubble Index vs. Nasdaq 100

0

200

400

600

800

1000

1200

Dec-94 Dec-96 Dec-98 Dec-00 Dec-02 Dec-04

Ind

ex (

Dec

31,

199

4 =

100

)

Bearing Credit Bubble Index Nasdaq 100 Index

2005 Credit bubble

2000 Tech bubble

Same Play, Different Same Play, Different ActorsActors

Magazine CoversMagazine Covers

Tech Boom June 19, 2000

Housing BoomJune 13, 2005

Same Play, Different Same Play, Different ActorsActors

Pied PipersPied Pipers

Abby Cohen June

1, 1998

Jim “Mad Money” CramerOctober 31, 2005

Same Play, Different Same Play, Different ActorsActors

20002000 20052005

SpeculatorsSpeculators Day tradersDay traders Condo flippersCondo flippers

LeverageLeverage Margin debtMargin debt Option ARMsOption ARMs

Power brokersPower brokers Venture capitalistsVenture capitalists Subprime lendersSubprime lenders

Vendor financingVendor financing Lucent, Cisco ->Lucent, Cisco ->

Dot-coms, telecomsDot-coms, telecomsAsian central banks -> Asian central banks -> U.S. consumersU.S. consumers

Super Bowl half-Super Bowl half-time show sponsortime show sponsor

E*Trade FinancialE*Trade Financial Ameriquest MortgageAmeriquest Mortgage

Hippest partiesHippest parties Dot-com IPO launch Dot-com IPO launch with Huey Lewiswith Huey Lewis

Miami high-rise launch Miami high-rise launch with Usherwith Usher

Peak absurdityPeak absurdity 1,600 online pet 1,600 online pet supplierssuppliers

$500,000 cabanas$500,000 cabanas

Youngest billionaireYoungest billionaire Jerry Yang, YahooJerry Yang, Yahoo

31 years old, $6.4 31 years old, $6.4 billionbillion

Sergey Brin, GoogleSergey Brin, Google

32 years old, $11.0 32 years old, $11.0 billionbillion

OverexposedOverexposed Jeff Bezos, David Jeff Bezos, David Wetherell (CMGI)Wetherell (CMGI)

Donald Trump, Donald Trump, homebuilder CEOshomebuilder CEOs

Wealth Effect or Illusion?Wealth Effect or Illusion?

Sources: Federal Reserve, Bearing Asset Management

Stated Net Worth vs. Fair Value Net Worth1980-2005

400%

450%

500%

550%

600%

650%

1980 1984 1988 1992 1996 2000 2004

Sta

ted

Ne

t W

ort

h /

DP

I

400%

450%

500%

550%

600%

650%

Fa

ir V

alu

e N

et

Wo

rth

/ D

PI

Stated Net Worth / DPI, % Fair Value Net Worth / DPI, %

Credit bubble

Tech bubble

Fair value net worth:Equities = 80% x DPIReal estate = 130% x DPI

“What I think I’m worth”

“What I’m really worth”

Wealth Effect or Illusion?Wealth Effect or Illusion?20002000 Tech Bubble Tech Bubble

Sources: Federal Reserve, Bearing Asset Management

Household Equities / Disposable Personal Income1980-2000

20%

40%

60%

80%

100%

120%

140%

160%

180%

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000

Ho

use

ho

ld E

qu

itie

s /

DP

I

-200%

-100%

0%

100%

200%

300%

400%

500%

600%

Infl

atio

n-a

dju

ste

d S

&P

50

0

Household Equities / DPI, % Inflation-adjusted S&P 500, %

Long-term average = 80% x DPI

March, 2000 = 177%

Wealth Effect or Illusion?Wealth Effect or Illusion?20052005 Credit Bubble Credit Bubble

Sources: Federal Reserve, Bearing Asset Management

Household Real Estate / Disposable Personal Income1985-2005

100%

120%

140%

160%

180%

200%

220%

240%

260%

1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005

Ho

use

ho

ld R

eal

Es

tate

/ D

PI

-45%

-30%

-15%

0%

15%

30%

45%

60%

75%

Infl

atio

n-a

dju

ste

d O

FH

EO

Ho

me

Pri

ce

Ind

ex

Household Real Estate / DPI, % Inflation-adjusted OFHEO Home Price Index, %

September, 2005 = 211%

Long-term average = 130% x DPI

Wealth Effect or Illusion?Wealth Effect or Illusion?20002000 Tech Bubble vs. Tech Bubble vs. 20052005 Credit Credit

BubbleBubble

Sources: Federal Reserve, Bearing Asset Management

Equities + Real Estate Overvalution vs. DPI1995-2005

0%

25%

50%

75%

100%

125%

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Eq

uit

ies

+ R

ea

l E

sta

te O

ve

rva

lua

tio

n /

DP

I

Equities Overvaluation / DPI, % Real Estate Overvaluation / DPI, %

Tech bubbleCredit bubble

Forbes 400 Wealthiest Forbes 400 Wealthiest AmericansAmericans

20002000 20052005

Real Real estate, estate, investmentinvestments, finances, finance

76 members76 members

$182.8 $182.8 billionbillion

(15% of (15% of total)total)

114 114 membersmembers

$288.7 $288.7 billionbillion

(26% of (26% of total)total)

TechnologyTechnology 99 members99 members

$473.4 $473.4 billionbillion

(40% of (40% of total)total)

44 members44 members

$219.3 $219.3 billionbillion

(20% of (20% of total)total)

Sources: Forbes, Bearing Asset Management

Stadium Naming Stadium Naming RightsRights

20002000 20052005

Financial Financial servicesservices

12 stadiums12 stadiums

(23% of (23% of total)total)

24 stadiums24 stadiums

(34% of (34% of total)total)

TechnologyTechnology 12 stadiums12 stadiums

(23% of (23% of total)total)

10 stadiums10 stadiums

(14% of (14% of total)total)

Bankrupt Bankrupt sponsorssponsors

1010

(19% of (19% of total)total)

??Sources: ESPN, League of Fans, Ryan Krueger, Wikipedia, Bearing Asset Management

Canary in the Coal Mine: Canary in the Coal Mine: 20002000 Key Consumer of Networking & Telecom Key Consumer of Networking & Telecom

EquipmentEquipmentNetworking Index vs. GSTI Internet Index

Q2 1999 - Q3 2000

250

500

750

1000

1250

1500

Jun-99 Sep-99 Dec-99 Mar-00 Jun-00 Sep-00

Net

wo

rkin

g In

dex

(N

WX

)

200

400

600

800

1,000

1,200

Inte

rnet

Ind

ex (

GIN

)

Networking 100 Index GSTI Internet Index

Internet leads

Tech equipment suppliers follow

Canary in the Coal Mine: Canary in the Coal Mine: 20052005Key Supplier of Mortgage CreditKey Supplier of Mortgage Credit

Housing Index vs. Fannie Mae2Q 2004 - Q4 2005

300

350

400

450

500

550

600

Jun-04 Sep-04 Dec-04 Mar-05 Jun-05 Sep-05

Ho

usi

ng

Ind

ex (

HG

X)

40

60

80

100

120

140

160

Fan

nie

Mae

Housing Index Fannie Mae

Fannie Mae leads

Home buyers follow

The Fat Lady is SingingThe Fat Lady is SingingCredit Drug Wearing OffCredit Drug Wearing Off

Source: Blogspot.com

The Fat Lady is SingingThe Fat Lady is SingingHome Inventories Rising Past Three Home Inventories Rising Past Three

MonthsMonths

Phoenix: Phoenix: 72.3%72.3% Miami: Miami: 47.7%47.7% Tampa: Tampa: 36.3%36.3% Washington, DC: Washington, DC: 34.1%34.1% Jacksonville: Jacksonville: 32.1%32.1% Boston: Boston: 28.5%28.5% Los Angeles: Los Angeles: 26.7%26.7%Sources: Housing Tracker, BusinessWeek

The Fat Lady is SingingThe Fat Lady is SingingRefi Tailwind Becoming ARM Reset Refi Tailwind Becoming ARM Reset

TsunamiTsunami

Source: Bearing Asset Management

Expected Increase in Mortgage Payments from ARM Resets1998-2007

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07

1-Y

ea

r L

ibo

r

-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

120%

Ex

pe

cte

d I

nc

rea

se

in

Mo

rtg

ag

e P

ay

me

nts

1-Year Libor Expected Increase in Mortgage Payments

Refinancing Tailwind

ARM Reset Headwind

““History doesn’t repeat itself, but it History doesn’t repeat itself, but it does rhyme.”does rhyme.”

- Mark Twain- Mark Twain