mark yusko's presentation at icio: year of the alligator

5/25/2018 Mark Yusko's Presentation At iCIO: Year Of The Alligator

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The 2014 iCIO Investment SummitThe Year of the All igator: Gravity Bites

May 19-20 2014


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Words of Wisdom

Six years ago, many investors were way out over their skis.

Giant financial institutions were brought to their knees. The

survivors pledged to themselves that they would forever bemore careful, less greedy, less short-term oriented Can we

say when it will end? No. Can we say that it will end? Yes.

And when it ends and the trend reverses, here is what we can

say for sure. Few will be ready. Few will be prepared.

Seth Klarman Baupost

Bloomberg BRIEF Q2 2014


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MCCM Strategy Review


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Volatile Year: Post Taper Tantrum, Equit ies > Safety in 13

Source(s): BigCharts.com.

EuropeS&P 500/R2000

GSCI

AGG/HY/EM

Long Bonds/Gold

Japan/China

Turtle Coyote Alligator


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MCCM Tactical Asset Class Positioning May 2013

Asset Class Stance Commentary

Domestic Equity = Valuations high; Profits Challenged; Defense best

International Equity + Japan momentum, ECB supporting Europe, EM ?

Opportunistic Equity + Long/Short strategies should extract dual Alpha

Absolute Return = ZIRP still challenging; True Arbitrage attractive

Real Estate + EM Development; Distressed, Niche Strategies

Energy & NR = Public markets battling $, Private markets best

Private Equity ++ Growth Capital in EM, Small LBO & VC best

Domestic FI = Volatility rising, Some value in Deflation hedge

Enhanced FI = Direct Lending Attractive, Spread Product at risk

Current MCCM Tactical Positions


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Source(s): Japancrush.com.

Words of Wisdom May 2013


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Said Abenomics Would Spur Growth & Inflation: RIGHT

Source(s): JP Morgan, TradingEconomics.com.


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Said Japan Inc. to Have Explosive EPS Growth: RIGHT

Source(s): Taiyo Pacific Partners, DaiwaAsset Management.


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Said Japan Rally Stil l Had Headroom: HAS MORE NOW

Source(s): Strategas, Sloane Robinson Estimates.

12% ROE, P/B 1.5(Plus Overshoot )

12% ROE, P/B 1.5

5-13

Current Rally 5-14


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Said Basket of Japan Inc. Stocks Would Rise: WRONG

S&P 500

Japan Airlines

Japan FoodsSMFG

Toyota/MarubeniMUFJ

Source(s) BigCharts.com.


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Said U.S. Housing Recovery Fading, GDP Follow? RIGHT

Source(s): CLSA, AdviserPerspectives.com.

Q4 Disappointed, Q1Miserable (not just weather)Latest estimate is negative


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Said U.S. Defensive Stocks Had Best Momentum: MIXED

Source(s): The Institutional Strategist Group (TIS Group), BigCharts.com.

HealthcareMaterials

DiscretionaryS&P 500

Energy

Staples


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Asked Does Valuation Matter? 23X for 11% Growth: NOPE

Hormel Foods Corporation (HRL)-NYSEPrev Close: 42.63

Bid: 30.00 x 1000 Ask: 42.97 x 1001y Target Est: 37.57Beta: 0.4852wk Range: 27.28 - 43.17Volume: 1,064,202 Avg Vol (3m): 907,056Market Cap: 11.31BP/E (ttm): 22.96EPS (ttm): 1.86 Estimated EPS 2.00Div & Yield: 0.68 (1.60%)

Source(s): TIS Group, BigCharts.com.


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Said Cos Levering Up, Buy Stock to Juice EPS: WORKED

Source(s): CLSA.

Financial Engineering 101:

Issue Debt, Buy Back Stock


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Said Maximum Margin Debt at Market Tops: Was EARLY?

Source(s): TIS Group, Streettalklive.com


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Said Complacency Nearing Highs, Minsky? RIGHT, But


?

Had a number of Minsky Momentsin 2013; every time Bernanke

hinted at Tapering, then wouldnot cut QE. What wil l save usnow?


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Said Risks Of Deflation Rising => More QE: RIGHT

Source(s) CLSA, Econoday.com.

?

QEinfinityWhere is theTapering impact?


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Said Falling Spain/Italy Yields Give Banks a Lift: RIGHT

Source(s) CLSA, BigCharts.com.

Banco Popolar

MedioBanca/SantanderSpain/Banca PMI

Italy

S&P 500


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Said If Japan Exporters Win, Someone Loses: WRONG

Germany, Korea &

Taiwan have beenbiggest beneficiariesof strong Yen, nowhave most to lose

Source(s): Mauldin Economics, CLSA.

GermanyPanasonic

S&P 500Korea

Taiwan

Japan

Toyota


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Said EM Consumer Dominating Global Growth: MIXED

Source(s): TGSFAdvisors, BigCharts.com.

Tata Motors

Nestle Afr ica/S&P 500

Hindustan LeverChina Consumer ETF


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Said China Slowdown = Time to Short AUD/CAD: RIGHT


CAD

AUD


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Said Chinese Export Data Doesnt Foot, Trouble? RIGHT

Source(s): CLSA, TradingEconomics.com.


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Said Chinese PPI Signals Lower Growth, Stocks: RIGHT

Source(s): CLSA, BigCharts.com.


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Said Frontier Markets Tracking EM Growth: RIGHT

Source(s): Everest Capital, BigCharts.com.

Frontier Markets: EM 2.0 Frontier Markets FundFrontier Markets ETF

Af rica ETFDeveloping Markets Fund

Emerging Markets ETF


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Said Was Moment of Truth for Gold: Precisely RIGHT

1,365If Gold breaks 1,356,then 1,200 comesinto play in a hurry

Source(s): TIS Group, COMEX.


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Said Oil Break Even to Push Prices Toward $100: RIGHT

Source(s): Goldman Sachs, COMEX.


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Words of Wisdom December 2013

You make the most money investing in Emerging Markets

when things go from truly awful to merely bad

Arjun Divecha - GMO

"Sooner or later everyone sits down to a banquet of

consequences.

Robert Louis Stevenson


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Said Bullish Sentiment Extreme, Be Cautious: RIGHT

Source(s): Strategas, BigCharts.com.

S&P 500

NASDAQ


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Said Defensive Sectors Lagged in 13, Lead in 14: RIGHT


Utilities

Energy

HealthcareMaterials/Staples

Financials

Discretionary

Defensive Sectors donot lead in robusteconomic recoveries


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Said Hussman Bubble Model Fits Mkt Trend Well: WOW

Source(s): hussman.com, BigCharts.com.


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Said Japanese Equity & $/Yen Had More Upside: WRONG

Source(s): dshort.com, TIS Group, BigCharts.com.

S&P 500Yen

NASDAQ

DXJNikkei


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Said Japan Had Both Trend & Momentum: REVERSED

Source(s) Strategas, BigCharts.com.

S&P 500Yen

NASDAQ

DXJNikkei


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Said Recovery Favors Europe (partic. Southern) > U.S. - RIGHT

Source(s): CLSA, BigCharts.com.

ItalySpain

France

S&P 500Germany

NASDAQ


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Said Greece Was at Economic Inflection Point: RIGHT

Source(s): Dromeus Capital, BigCharts.com.

Ai rl ine

Gaming

Telecomm

S&P 500

NASDAQGREK


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Some EM Valuations Were Compellingly Cheap: MIXED

Source(s): JP Morgan, BigCharts.com.

IndiaTurkey/Indonesia

Brazil/S. Africa

EMS&P 500

NASDAQChina

Russia


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Said Foreign $ Believes India Story, BJP Win Big: RIGHT

Source(s): CLSA, Times Now India, BigCharts.com.

ICICITata Motors

HDFC

India ETF

S&P 500


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Said History Doesnt Repeat, But Would Rhyme: RIGHT

Source(s): CLSA, TIS Group.

Path of 10-Year rate looks eerily similarto beginning of 2011, Lots moredownside if follows path of 2H 2011


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Said Long Bonds at Inflection Point; Trend Down: RIGHT


Long Bonds

S&P 500

30 Year Yields


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Said Soft Commodities Poised for Bradley Turn: RIGHT

Source(s): TIS Group.


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Said Contrarian Opportunity in Metals & Mining: MIXED


Gold MinersSilver Miners

S&P 500Global Miners

Metals & Mining


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Said Rising Nat Gas Prices May Create Coal Opp: MIXED


NatGasConsol/NG ETF

Cloud PeakS&P 500

Peabody

Arch


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2014: The Year of the Alligator

The Trouble With Alligators

They Bite

f C


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2013, The Year of the Coyote, Led to Huge Alligator Jaws


Japan/R2000

S&P 500

Europe

China/REITs/AGG/HYEM/GSCI

Long Bonds

Gold

Bi Alli t J C l & E i I di t


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Big Alligator Jaws Complacency & Economic Indicators

Source(s): StreetTalkLive.com.

When Jaws Open(Blue Circles)They Always Close

Did 1/1 B dl D t T i R l f 2013 T d ?


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Did 1/1 Bradley Date Trigger Reversal of 2013 Trends?


Bradley Date Flipped Gator on Head Inverted Key Trends


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Bradley Date Flipped Gator on Head, Inverted Key Trends

Ags

GSCI/EuropeEM

S&P 500

Yen/$

NKY/Japan Y

Japan Y

S&P 500/NKY

Yen/$Europe

GSCI

EMAgs


EVERYONE Expected Dollar Rally: Especially Yen Shorts


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EVERYONE Expected Dollar Rally: Especially Yen Shorts

Source(s): 13d Research, CLSA

Where head goes, bodyfollows. $/Yen strength

was unexpected, tookdown Japanese Equities

Japan Lagging + Foreign $ Giving Up = Max Pessimism?


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Japan Lagging + Foreign $ Giving Up = Max Pessimism?

Source(s): CLSA.

S&P 500 Sector Alligator Jaws Perfectly Inverted in 2014


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S&P 500 Sector Alligator Jaws Perfectly Inverted in 2014

Utilities

Energy

HealthcareMaterials/Staples

Financials

Discretionary

DiscretionaryHealthcare

Financials

Staples/Materials/Energy

Utilities

ParadoxDefensive Sectors donot lead in robusteconomic recoveries


Meaningful U S Sector Rotation: Value/Defensive Rising


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Meaningful U.S. Sector Rotation: Value/Defensive Rising


Because Consumer Spending Momentum Turned Down?


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Because Consumer Spending Momentum Turned Down?

Source(s): StreetTalkLive.com.

Core EuroGators Ruled in 13 Italian Gator Winning 14


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Core EuroGators Ruled in 13, Italian Gator Winning 14

S&P 500Germany

France

Italy/UK

Italy

France

UK

S$P 500/Germany


Alligators > Crocodiles in 13, Crocs & Caimans Lead 14


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Alligators Crocodiles in 13, Crocs & Caimans Lead 14

India

Brazil

EEMS&P 500

China

Russia

S&P 500

RussiaEEM/China

India

Brazil


Crimean Situation Made Russian Gator Jaws Open Wider


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Crimean Situation Made Russian Gator Jaws Open Wider

Source(s): BigCharts.com, TIS Group.

NASDAQ

S&P 500

Russia ETFLukoil

Gazprom

Russian Oil Assets Extremely Cheap, Snapping Shut Now


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y p, pp g


S&P 500

NASDAQGazprom

LukoilRussia ETF

China Equities Really Cheap: Opportunity or Value Trap?


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q y p pp y p

Source(s): CLSA.

Very Tight Credit Conditions in China => Lower Growth?


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y g

Source(s): CLSA.

Deflation Signs in China Point to Muted Equity Returns


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Source(s): CLSA.

Taper Fears Led to Fragile 5 Gator Jaws, Reversal on 2/3


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Turkey

IndonesiaIndia

BrazilS. Africa

S&P 500

S&P 500

India

S. Africa

Brazil

Indonesia/Turkey


Turkey Raised Rates, Lira Stabilized, Gator Jaws Turned


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Stocks Crushed Bonds in 2013, Jaws Reversed in 2014


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Long Bonds

EM Debt

Munis

S&P 500

NASDAQ

NASDAQ

S&P 500

Munis

Long Bonds

EM Debt


When EVERYONE on One Side of Trade, Pays to Leave


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Coming into 2014,Net Short Interest inTreasuries washighest in a decade

Source(s): 13d Research.

Housing Made Huge Gator Jaws in 13, Inverted in 14


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Long Bonds

Home DepotHome Builders ETFLowes

Lowes

Home Depot

Home Builders ETF

Long Bonds


Housing Data Has Rolled Over Hard, Losing Momentum


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Source(s): CalcualtedRiskBlog.com.

Jaws Couldnt Have Opened Much Wider on Gold/Miners


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Gold Miners

Gold

S&P 500

NASDAQ

NASDAQ

S&P 500

Gold

Gold Miners


Mini Jaws Opened in Energy Services at Year End 2013


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Energy Services

E&P

S&P 500

NASDAQ

NASDAQ

S&P 500

Energy ServicesE&P


Polar Vortex Depleted NatGas Reserves, Must Dri ll More


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Higher NatGas Prices Making Coal Cost Effective Again


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Drawdowns in Copper Inventories Setting Price Floor?


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Micro-cap (read junky) Opened Widest Jaws, Closing Fastest


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Value

S&P 500Growth

Small

Micro

Micro

Small

GrowthS&P500/Value


Gravity Held Old Tech in 13, Gravity Bit New Tech in 14


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Priceline

Amazon/Google

S&P500

OracleApple

Broadcom

OracleApple

Broadcom/S&P 500

Priceline

Google

Amazon


Biotech Juiced Alligator Jaws, Steroids Fade Eventually


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GILD

S&P 500

AMGN

CELG

CELG

GILD

BIIB

IBB

NASDAQS&P 500



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Market Outlook


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Dont Cry, Its

Me, Argentina

Lowest Equitization Ratio in World? Serious Upside


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Source(s): Neuberger Berman, TradingEconomics.com.

STOCKS TRADED; TOTAL VALUE(% OF GDP) IN ARGENTINA

Argentina Shale Gas Reserves 3rd Largest Globally


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Source(s): Blog.thompsonreuters.com.


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Greece is the Word

Greece Economic Recovery Gaining Momentum into 2014


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Source(s): TradingEconomics, Markit.

Despite 100%+ Move Off Bottom, Lots of Upside & Cheap

Greek Stock Market Athens Exchange


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Source(s): TradingEconomics, Bloomberg.Note(s): CAPE is CyclicallyAdjusted Price to Earnings.

Greek Stock Market Athens Exchange

Prices are Now at Levels From Mid - 1990s

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

2006 2007 2008 2009 2010 2011 2012 2013

AthensCAPERatio

Lowest Shil ler P/E in the World


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Ready for theReign in Spain

Spanish GDP Recovery Gathering Real Momentum


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Source(s): TradingEconomics, Bloomberg.

25

30

35

40

45

50

55

Jul08

Dec

08

May

09

Oct09

Mar10

Aug

10

Jan

11

Jun

11

Nov

11

Apr12

Sep

12

Feb

13

Jul13

Dec

13

SpainPMI

Spain Index at Same Price as 1999, MktCap/GDP Cheap

SPAIN STOCK MARKET (IBEX 35)


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Source(s): TradingEconomics, Bloomberg.

SPAIN STOCK MARKET (IBEX 35)


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India Rajan and theTemple of Boom

New Central Bank Head Stabil ized Rupee & CA Deficit


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Source(s): Bloomberg, CLSA.

Pro-Business Govt in India Will be a Game Changer


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Source(s): Indiatoday.in.com, Haryanaabtak.com.


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The Great Call of China

Chinese Equities at All-Time Low Valuations (on surface)

Chi A Sh CA i


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Source(s): Bloomberg, dailywealth.com.

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

2006 2007 2008 2009 2010 2011 2012 2013

ChinaAShareCAPERatio

Chinas Two Index Sectors: Private vs. SOE, Own Private


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Source(s): JP Morgan Asset Management, Bloomberg.


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The Abe-san Also

Rises in Japan

Goal: Real GDP Growth & Accelerating Inflation; Check


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Source(s): TradingEconomics, CLSA, TIS Group.

Japan ROEs Rising as Yen Falls & EPS Rise, P/Es Fall!


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Source(s): Neuberger Berman, iii.co.uk.


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The Final Frontier

FM Tiny % of Global Markets, Despite Far Better Growth


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Source(s): Blackrock, Shroders.

Frontier Markets Following Established Path: EM 2.0


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Source(s): Everest Capital.

GMO Continues to Forecast Lean Returns for Traditional

Alpha


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Source(s): GMO.

Post-Crisis Deleveraging Historically Measured inDecades


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Source(s): Hoisington Capital Management.

U.S. Growth Decelerates as Boomers Age, DeflationBites


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Source(s): TIS Group, CLSA.

Fed in Good Company Being Overoptimistic on Growth


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First Estimate 0.1% (expected to go lower)

Source(s) AdviserPerspectives.com.

U.S. EPS Cycle is Worst in Post WW II Era, Q1 Negative?


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Source(s) AdviserPerspectives.com.

Valuations are Clearly Elevated, Can Become More So


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Source(s): KimbleChartingSolutions.com.

Low Inflation Allows High P/E, But 91st % Expensive


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Source(s): AdvisorPerspectives.com.

Five Year Cycle Looks Like Half an Alligator Jaw


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+200%

Source(s): JPMorgan Research.

Investors Buy What They Wish They Would Have Bought


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Source(s): AdvisorPerspectives.com, STAWealth.com.

Current Equity Rally Nearing Top End of HistoricalRange


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Source(s): KimbleChartingSolutions.com, StreetTalkLive.com.

S&P 500 Tracking Normal Mid-Term Election Pattern


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Source(s): Strategas.

One Analysts Perspective on Alligator Jaws Closing


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Source(s): StreettTalkLive.com

Projections from 4/18/14

Hussman Bubble Model Fits Market Trend Eerily Well


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Source(s): hussman.com.

Closed at 1897,touched 1900intraday on 5/13

Zimmerman is the Most Bearish of Forecasters, Crazy?


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Source(s): United-ICAP.com.

Stock, Bond, FX, Cmdty Vol at Lows: Minsky Moment?


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VIX Index Hit 12.04 on May 14th, Really Close to Trigger


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TVIX: Gator Protection? Snaps Hard When Need It Most

S


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Might be the most

gaping Alligator Jawswe have seen

When Volatil ity Spikes,Huge ConvexityUp 70% in JanuaryUp 400% in 2011


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Implementation

MCCM Current Asset Class Overview May 2014

MCCM Current Tactical Positions


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Asset Class Position Commentary

Domestic Equity - Valuations Very High; Profits weak; Defense best

International Equity + Japan profits high, Europe recovering, EM cheap

Opportunistic Equity + Opportunistic/Hedged strategies favored for Alpha

Absolute Return = Low Rates challenging for M/N, Arbitrage > Bonds

Real Estate = EM development; Mezzanine Lending, Public RE

Energy & NR ++ Reserve Acquisition, Global Shale Plays, Alt Energy

Private Equity ++ Growth Capital in EM, Small LBO & Venture Capital

Domestic FI = Deflation risk has made long duration attractive

Enhanced FI = Direct Lending Attractive, Credit strategies at risk

MCCM 5-Yr Forecasts Favor EM Equity & Private Markets

25.0% Public - Equity

Public - Credit

5-year Market Nominal Return Expectations


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Source(s):Baird, S&P/LCD, Bloomberg, Thomson Reuters, Bank of America Merrill Lynch, JP Morgan, and Morgan Creek.Note(s): Public Equity returns utilize S&P 500, Eurostoxx 600, MSCI Japan, MSCI Brazil, MSCI Russia, MSCI India, MSCI China, and Morgan Creek; Public Credit expectations utilize BAML High YieldMaster, BAML Corporate Master, and JPM EMBIG indices. Return expectations for private markets include fund manager fees while public markets do not because investors do not have access to grossreturns in the private markets. The above information reflects opinions of Morgan Creek as of the time this presentation is written and all such opinions are subject to change. No representation or warranty,express or implied, is given by Morgan Creek as to the accuracy of such opinions and no liability is accepted by such persons for the accuracy or completeness of any such opinions.

Methodology

Consistent application of growth, yield and multiple assumptions across markets

Scenario analysis and FX impact included where possible

4% 4%

10%

4%

10%

7%

8%7%

3%

5%

11%

15%

19%

20%

11%

13%

10%

-

5.0%

10.0%

15.0%

20.0%

USA Europe Japan Brazil Russia India China High Yield InvestmentGrade

EmergingMarket

Large-CapBuyouts

Mid-CapBuyouts

Small-CapBuyouts

Asia GrowthEquity

Real EstateAcquisition

OilfieldServices

Credit

Private

PrivateInvestments

In Challenging Environment, Need A Different Approach

E h d

Investors Now Facing The 0, 3, 5 Conundrum


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Emerging

Markets

TraditionalEfficientFrontier

HedgeFunds

Source: Bloomberg, GMO, NACUBO, MCCM Estimates

EndowmentModel

Portfolio

EnhancedEfficientFrontier

Source(s): GMO, MCCM estimates, TIAA CREF returns for Real Assets.Forecasts: returns for cash/bonds = current yield, returns for equities = GMO estimates, returns for hedge funds = stocks+3% alpha, returns for private = 20 year historical averageDefinition(s): Compound ROR = compound rate of return; Annualized standard deviation = risk as measured by the variability of performance. The higher the standard deviation, the greater the variability(and therefore, the risk) of the fund or index; Traditional Efficient Frontier = addition of traditional asset classes such as stocks and bonds; Enhanced Efficient Frontier = addition of more alternative assetclasses. Endowment Model Portfolio estimates calculated using Policy Portfolio and forecast asset class returns.

Farmland

Timber

Real Estate

TraditionalModel

PortfolioEMD

Most Have No Ag Investments Despite Strong Returns


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Source(s): TIAA CREF, HFRI, CA Private Equity Index, Public Pension Data 06/30/13, NACUBO 06/30/13.

TraditionalInstitutionalPortfolio

PrivateEquity

HedgeFunds

Average

Endowment

Unconstrained MVO: Ag Investments Crowd Out Equities


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Source(s): TIAA CREF.

Challenging Environment Requires New Implementation

nts

Domestic Equity


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PrivateInvestments

Trad

itionalInvestmen

Real Estate

Private Equity

Absolute Return

Global Opportunist ic

Enhanced Fixed Income

Traditional Fixed Income

Emerging Markets Equity

Energy & Natural Resources

International Equity

MarketableAlternatives

Contact Information


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Morgan Creek Capital Management, LLC

301 W. Barbee Chapel Road, Suite 200

Chapel Hill , NC 27517

Contact:

Andrea Szigethy

Phone: (919) 869-8077

Email: [email protected]: www.morgancreekcap.com


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Important Disclosures

MSCI World Index -- this isa free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed markets. The MSCI World Index currentlyconsists of 24 developed market country indices.Morgan Stanley Capital International definition is from Morgan Stanley.

MSCI BRIC-- thisis a free-float adjusted market capitalization weighted index that is designed to measure the equity market performance of the following four emerging market country indices: Brazil, Russia,India and China.

MSCI Emerging Markets Index-- this is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets. As of November 2012 theMSCI Emerging Markets Index consisted of the following 23 emerging market country indices: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Malaysia,Mexico, Peru, Philippines, Poland, Qatar, Russia, South Africa, Taiwan, Thailand, Turkey, and United Arab Emirates.


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MSCI Europe Index-- thisis a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of the developed markets in Europe. The MSCI Europe Indexcurrently consists of 16 developed market country indices.

MSCI ACWI Index--this is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed and emerging markets. The MSCI ACWI consistsof 45 country indices comprising 24 developed and 21 emerging market country indices. Source: MSCI Barra.

Barclays Aggregate Bond Index -- this is a composite index made up of the Barclays Government/Corporate Bond Index, Mortgage-Backed Securities Index and Asset-Backed Securities Index, whichincludes securities that are of investment-grade quality or better, have at least one year to maturity and have an outstanding par value of at least $100 million. Definition is from Barclays.

CAC 40 Index The CAC 40 Index is a capitalization weighted index and the principal French stock index covering 40 French Equities.


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mark yusko's presentation at icio: year of the alligator

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