the view from the fiscal cliff: economic update and ... · 3 stock market barely-believed bull –...

1

The View From the Fiscal Cliff:Economic Update and Thoughts

on 2013 and Beyond

Presented by:

Jeffery A. Acheson, QPFC, AIF®

Partner

Schneider Downs Wealth Management Advisors, LP

SD Retirement Plan Solutions Division

Important Information

The views and opinions expressed are those of the speaker and are subjectto change based on factors such as market and economic conditions. Theseviews and opinions are not an offer to buy a particular security and shouldnot be relied upon as investment advice. Past performance cannotguarantee comparable future results.

Important InformationPerformance quoted is past performance and cannot guarantee comparable future results; current performance may be higher orlower.

Results shown assume the reinvestment of dividends.

An investment cannot be made directly in an index.

Investments with higher return potential carry greater risk for loss.

Investing in small companies involves greater risks not associated with investing in more established companies, such as business risk,significant stock price fluctuations and illiquidity.

Foreign securities have additional risks, including exchange rate changes, political and economic upheaval, the relative lack ofinformation about these companies, relatively low market liquidity and the potential lack of strict financial and accounting controlsand standards.

Investing in emerging markets involves greater risk than investing in more established markets such as risks relating to the relativelysmaller size and lesser liquidity of these markets, high inflation rates, adverse political developments and lack of timely information.

Fluctuations in the price of gold and precious metals often dramatically affect the profitability of the companies in the gold andprecious metals sector. Changes in political or economic climate for the two largest gold producers, South Africa and the formerSoviet Union, may have a direct effect on the price of gold worldwide.

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Stock Market

Fiscal cliff

October 1, 2012

Total federal taxes would jump +20%. That would kill economic expansion.

This just‐released study from the influential think‐tank in Washington is bound to alarm congressional legislators on both sides of the aisle. In my opinion, it’s likely that they will enact legislation in their lame duck session to postpone the cliff until mid‐2013.

Medicare and Medicaid

Social Security

Other Federal Noninterest Spending

Source: The National Commission on Fiscal Responsibility and Reform – The Moment of Truth, The White House, December 2010 (aka “Simpson-Bowles”).

Economic Data

Simpson-Bowles –the guts of a grand compromise


Social Security


Economic Data

Simpson-Bowles –the guts of a grand compromise

Social Security: • Gradual move to a more progressive benefit formula that slows future benefit growth. (P. 49)• Gradual increase in retirement age, indexed to increases in life expectancy. (P. 50)

Health Care:• Reduce or eliminate tax exclusion for employer‐paid health insurance premiums. (P. 36)• Pay providers based on quality, not quantity. (P. 36)• Raise the annual deductible and patient co‐pay to reduce over‐utilization. Restrict first‐dollar coverage in Medigap policies. (P. 38)• Eliminate states’ gaming of Medicaid tax gimmick. (P. 39)• Medical malpractice reform (P. 39)• Establish a federal healthcare spending growth cap of GDP +1%. (P. 41)

Taxes: • Lower rates, broaden base, cut deductions, maintain or increase progressivity. (P. 28)

Key Provisions:

Source: The National Commission on Fiscal Responsibility and Reform – The Moment of Truth, The White House, December 2010 (aka “Simpson-Bowles”).

3

Stock Market

Barely-believed bull – S&P 500 TR index is up +18% YTD

Source: Standard & Poor’s. Data through October 5, 2012. 1 Fed’s September 13th meeting statement: the Committee decided to continue through the end of the year its program to extend the average maturity of its holdings; buy $40 billion per month of mortgage-backed bonds, open-ended commitment (QE 3). 2 Barron’s survey of 10 Wall Street strategists published December 19, 2011.

QE 1

4/23/101217

5/6/10Flash Crash 5/9/10

1st European Rescue Plan‐ EFSF

‐16%

7/2/101022

8/13/10 David Rosenberg: double‐dip recession is "a virtual certainty."

8/27/10Bernanke's speechat Jackson Hole, hinting at QE2.

+33%

12/19/10Meredith Whitney:

"You could see fifty to 100 sizeable defaults."

QE 2

May‐June 2011: softer

economic data

4/29/111363 7/21/11

2nd European Rescue Plan ‐ increased EFSF, 20% Greek haircut

‐19%

8/5/11S&P cuts U.S. debt rating

10/3/111,099

12/20/11ECB institutes LTRO

+29%

Operation Twist1 and QE 3

4/2/121,419

Weak March‐Junejobs reports;

European austerityfatigue

‐10%

6/1/121,278

6/20/12Operation Twist

extended through YE

7/26/12ECB says it will "do whatever

it takes" to save euro

9/6/12ECB announces

unlimited bond‐buyingprogram

9/13/12Fed announces

QE 3

900

1000

1100

1200

1300

1400

1500

Jan‐10

Feb‐10

Mar‐1

0

Apr‐1

0

May‐1

0

Jun‐10

Jul‐1

0

Aug‐1

0

Sep‐10

Oct‐1

0

Nov‐1

0

Dec‐1

0

Jan‐11

Feb‐11

Mar‐1

1

Apr‐1

1

May‐1

1

Jun‐11

Jul‐1

1

Aug‐1

1

Sep‐11

Oct‐1

1

Nov‐1

1

Dec‐1

1

Jan‐12

Feb‐12

Mar‐1

2

Apr‐1

2

May‐1

2

Jun‐12

Jul‐1

2

Aug‐1

2

Sep‐12

Oct‐ 1

2

Nov‐1

2

Dec‐1

2

S&P 500 Index

Strategists’ average beginning‐of‐year forecast for S&P 500 at 12/31/12 was 1334.2

Stock Market

New highs – what’s behind the barely-believed bull?

ISM PMIs ‐ strong Leading Economic Indicators (LEI) – up ECRI’s weekly LEI – five straight up weeks Citi’s economic surprise index ‐ up ADP’s August new jobs > 200K Weekly unemployment claims – consecutive down weeks Housing starts – up Home prices – up Car sales ‐ strong Consumer income and spending – up Retail sales ‐ up Household net worth – up Bank lending – up S&P earnings estimates – holding up CPI – down Valuation – room for P/E multiple expansion IMF’s October global forecast shaved but holding up Copper rallied +12% from summer lows and stabilized

Better (and better than expected) economic data has been piling up:

See the following pages.

The stock market rally from the June bottom has not only been fueled by QE. The more significant catalyst, in my opinion, has been the accumulation of better – and better‐than‐expected – economic data.

Stock Market

New highs – what’s behind the barely-believed bull?

Quantifying better‐than‐expected economic data:

The Citigroup Economic Surprise Indices are objective and quantitative measures of economic news. They are defined as weighted historical standard deviations of data surprises (actual releases vs Bloomberg survey median). A positive reading of the Economic Surprise Index suggests that economic releases have on balance beating consensus. The indices are calculated daily in a rolling three‐month window. The weights of economic indicators are derived from relative high‐frequency spot FX impacts of 1 standard deviation data surprises. The indices also employ a time decay function to replicate the limited memory of markets. ‐‐ Bloomberg

Source: Citigroup. Data through October 4, 2012

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Sources: Yardeni Research, Inc. and Thomson Financial survey of consensus estimates.

Stock Market

S&P 500 — earnings estimates holding up

$103.37

$115.19

2012 and 2013 estimates have held steady despite all of the recent talk of weaker earnings.

Sources: Yardeni Research, Inc. and Thomson Financial survey of consensus estimates.

Stock Market

S&P 500 — revenues estimates up

2012 and 2013 revenue estimates have turned up.

1 Estimated 2012 and 2013 bottom-up S&P 500 earnings per share (left scale) as of September 27, 2012: for 2012, $103.37; for 2013, $115.19. Sources: Yardeni Research, Inc. and Thomson Financial survey of consensus estimates. Standard and Poor’s for index price data through October 1, 2012; and actual earnings data through June 30, 2012.

Stock Market

S&P 500 — earnings estimates holding up

S&P 500 Earnings

20121

20131

S&P 500

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

0.00

20.00

40.00

60.00

80.00

100.00

120.00

1988Q4

1989Q4

1990Q4

1991Q4

1992Q4

1993Q4

1994Q4

1995Q4

1996Q4

1997Q4

1998Q4

1999Q4

2000Q4

2001Q4

2002Q4

2003Q4

2004Q4

2005Q4

2006Q4

2007Q4

2008Q4

2009Q4

2010Q4

2011Q4

10/1/2…

2013Q3

S&P 500 Index

S&P 500 Earnings ($)

See how grossly distorted valuations became in the bubble run from 1993 to 2000 – the gap between the S&P Index (black line) and earnings (red line).

5

Economic Data

Europe’s leading economic indicators

The seven components of The Conference Board Leading Economic Index® for the Euro Area:1) Economic Sentiment Index (source: European Commission DG-ECFIN) ; 2) Index of Residential Building Permits Granted (source: Eurostat);3) EURO STOXX® Index (source: STOXX Limited); 4) Money Supply (M2) (source: European Central Bank); 5)Interest Rate Spread (source: European Central Bank); 6) Eurozone Manufacturing Purchasing Managers’ Index (source: Markit Economics); 7) Eurozone Service Sector Future Business Activity Expectations Index (source: Markit Economics).

Source: ©The Conference Board. Data through August 2012.

LEI

“In August, the LEI for the Euro Area rose for the first time in six months, fueled by good stock market performance and improved business confidence. However, it seems too early to interpret this as a sign of stabilization, let alone as a sign of a sustainable recovery. … Production‐related indicators remained in contraction territory and consumer confidence declined on rising unemployment fears. If European decision makers can maintain the momentum towards greater financial and fiscal stabilization, then these first signs of better business confidence may help to support somewhat stronger economic conditions later in the year or early 2013.”

Economic Data

China’s leading economic indicators

The six components of The Conference Board Leading Economic Index® for China:1) Total Loans Issued by Financial Institutions (source: People’s Bank of China); 2) 5000 Industry Enterprises Diffusion Index: Raw Materials Supply Index (source: People’s Bank of China) ; 3) NBS Manufacturing PMI Sub-Indices: PMI Supplier Deliveries (source: National Bureau of Statistics) ; 4) Consumer Expectations Index (source: National Bureau of Statistics); 5) Total Floor Space Started (source: National Bureau of Statistics); 6) NBS Manufacturing PMI Sub-Indices: Export Orders (source: National Bureau of Statistics).


“The improvement in the China LEI in August raises expectations for a moderate rebound in growth, even as current economic conditions remain subdued. The LEI’s largest increase in seven months was primarily due to a rebound in real estate activity, with strong credit growth and an improvement in consumer expectations also adding to the uptick.”

Economic Data

World GDP growth forecasts

Source: IMF, World Economic Outlook Update, October 8, 2012.

2009‐2011Actual

2012‐2013Forecast

-8

-6

-4

-2

0

2

4

6

8

10

12

Euro Area U.S. Japan China Brazil India

GD

P G

row

th (

% C

hang

e Y/

Y)

GDP Growth Forecasts

6

Source: Bureau of Labor Statistics; data through September 2012.

Economic Data

Private jobs rising, government jobs still contracting

With the fiscal crisis, net government job formation has been a damper on total new job formation.

Government sector job formation is unlikely to pick up much given budget constraints.

The recovery in private sector new job formation has been sluggish but not too atypical.

Private 104

2010 census hiring spike

Government10

Total 114

‐1000

‐800

‐600

‐400

‐200

0

200

400

600

Jan‐02

Apr‐0

2Jul‐0

2Oct‐0

2Jan

‐03

Apr‐0

3Jul‐0

3Oct‐0

3Jan

‐04

Apr‐0

4Jul‐0

4Oct‐0

4Jan

‐05

Apr‐0

5Jul‐0

5Oct‐0

5Jan

‐06

Apr‐0

6Jul‐0

6Oct‐0

6Jan

‐07

Apr‐0

7Jul‐0

7Oct‐0

7Jan

‐08

Apr‐0

8Jul‐0

8Oct‐0

8Jan

‐09

Apr‐0

9Jul‐0

9Oct‐0

9Jan

‐10

Apr‐ 1

0Jul‐1

0Oct‐1

0Jan

‐11

Apr‐1

1Jul‐1

1Oct‐1

1Jan

‐12

Apr‐1

2Jul‐1

2Oct‐1

2

1‐m

onth chan

ge (000)

Jobs by Category1‐month change (000)

Source: ADP, Bureau of Labor Statistics. Data through September 2012.

Economic Data

ADP jobs survey – private jobs recovery looks pretty normal

ADP private sector jobs reports showing higher lows, higher highs.

Note the last two summer slumps.

ADP estimate

BLS estimate

162k (ADP)

104k (BLS)

‐900

‐700

‐500

‐300

‐100

100

300

Jan‐01

Jun‐01

Nov‐0

1

Apr‐0

2

Sep‐02

Feb‐03

Jul‐0

3

Dec‐0

3

May‐0

4

Oct‐0

4

Mar‐0

5

Aug‐0

5

Jan‐06

Jun‐06

Nov‐0

6

Apr‐0

7

Sep‐07

Feb‐08

Jul‐0

8

Dec‐0

8

May‐0

9

Oct‐0

9

Mar‐1

0

Aug‐1

0

Jan‐11

Jun‐11

Nov‐1

1

Apr‐1

2

Sep‐12

Private nonfarm

payrolls

1‐m

onth chan

ge (000)

Economic Data

Goods vs. Services % of GDP

Non‐manufacturing comprises the vast majority of the U.S. economy.

Goods

29% of GDP

Structures

7% of GDP

Services

64% of GDP

0

4,000

8,000

12,000

16,000

1990‐I

1990‐IV

1991‐III

1992‐II

1993‐I

1993‐IV

1994‐III

1995‐II

1996‐I

1996‐IV

1997‐III

1998‐II

1999‐I

1999‐IV

2000‐III

2001‐II

2002‐I

2002‐IV

2003‐III

2004‐II

2005‐I

2005‐IV

2006‐III

2007‐II

2008‐I

2008‐IV

2009‐III

2010‐II

2011‐I

2011‐IV

Contribution to GDP by Category ($billions)

(stacked

chart)

Source: Bureau of Economic Analysis. Data through March, 2012.

7

Source: BEA, WardsAuto. Data through September 2012.

Economic Data

Vehicle sales recovering – pent-up demand

September’s 14.9 million annual run rate was above estimates and set a new recovery high water mark.

Total Cars and Light Trucks

August 2009 cash for clunkers

5

10

15

20

25

Jan‐90

Jul‐9

0Jan

‐91

Jul‐9

1Jan

‐92

Jul‐9

2Jan

‐93

Jul‐9

3Jan

‐94

Jul‐9

4Jan

‐95

Jul‐9

5Jan

‐96

Jul‐9

6Jan

‐97

Jul‐9

7Jan

‐98

Jul‐9

8Jan

‐99

Jul‐9

9Jan

‐00

Jul‐0

0Jan

‐01

Jul‐0

1Jan

‐02

Jul‐0

2Jan

‐03

Jul‐0

3Jan

‐04

Jul‐0

4Jan

‐05

Jul‐0

5Jan

‐06

Jul‐ 0

6Jan

‐07

Jul‐0

7Jan

‐08

Jul‐0

8Jan

‐09

Jul‐0

9Jan

‐10

Jul‐1

0Jan

‐11

Jul‐1

1Jan

‐12

Jul‐1

2

New

Unit Sales SA

AR (m

illions)

Sources: U.S. Census Bureau, data through July 2012; Mortgage Bankers Association’s housing starts forecast dated August 20, 2012.

Economic Data

Housing starts recovering

Housing Starts(actual)

May 2009First-time homebuyers tax

credit announced

April 2010End of tax credit

Housing Starts (estimated)

300

500

700

900

1,100

1,300

1,500

1,700

1,900

Sep-06

Nov-06

Jan-07M

ar-07M

ay-07Jul-07Sep-07

Nov-07

Jan-08M

ar-08M

ay-08Jul-08Sep-08

Nov-08

Jan-09M

ar-09M

ay-09Jul-09Sep-09

Nov-09

Jan-10M

ar-10M

ay-10Jul-10Sep-10

Nov-10

Jan-11M

ar-11M

ay-11Jul-11Sep-11

Nov-11

Jan-12M

ar-12M

ay-12Jul-12Q

3 12 (E)

Q1 13 (E)

Q3 13 (E)

(000

's)

Source: U.S. Census Bureau. Actual population data through 2008; projections 2009-2020. Actual annual housing starts through 2011.

Economic Data

Housing starts: the big picture – very positive

Housing Starts

U.S. Population Growth (actual)

U.S. Population Growth (projected)

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

2018

2020

(000

's)

Basic housing arithmetic: the U.S. adds about 3 million bodies per year … we need to build about 1.5 million new units per year. New home construction will substantially recover.

8

Economic Data

Construction and vehicles combined – tailwind for GDP growth

Historically these two categories have contributed >12% of GDP. Today, they are ~10%.

There is good reason to think both will continue to recover, providing a lift to GDP in the quarters ahead.

Sources: Bureau of Economic Analysis. Data through June 2012.

0%

2%

4%

6%

8%

10%

12%

14%

16%

1990-I

1991-I

1992-I

1993-I

1994-I

1995-I

1996-I

1997-I

1998-I

1999-I

2000-I

2001-I

2002-I

2003-I

2004-I

2005-I

2006-I

2007-I

2008-I

2009-I

2010-I

2011-I

2012-I

% o

f G

DP

(sta

cked

)

Vehicles

Structures

Source: Federal Reserve. Data through June 2012, released September 20, 2012.

Economic Data

Household debt

Household debt

Disposable personal income

(DPI)

0

2

4

6

8

10

12

14

16

1990Q1

1990Q4

1991Q3

1992Q2

1993Q1

1993Q4

1994Q3

1995Q2

1996Q1

1996Q4

1997Q3

1998Q2

1999Q1

1999Q4

2000Q3

2001Q2

2002Q1

2002Q4

2003Q3

2004Q2

2005Q1

2005Q4

2006Q3

2007Q2

2008Q1

2008Q4

2009Q3

2010Q2

2011Q1

2011Q4

($ trillions)

The stock of household debt is high by historic comparison. This is often taken to mean that Americans are struggling under an unsupportable debt load.

Because DPI has steadily increased and interest rates are far lower than in previous decades, in fact, Americans are in the best shape with respect to servicing their household debt than they’ve been in a long time. See next slide.

Source: Federal Reserve, data through June 2012; released September 27, 2012.

Economic Data

Consumers’ Financial Obligations Ratio – record low

Comparing consumers’ monthly flow of income to their fixed recurring monthly expenses, including debt service, gives a more accurate measure of consumers’ financial health.

Here’s the shocker: consumers’ ability to cover the monthly “nut” has seldom been better as incomes have recovered, household debt has been reduced and interest rates remain low.

15.7%

14%

15%

16%

17%

18%

19%

1980Q1

1981Q1

1982Q1

1983Q1

1984Q1

1985Q1

1986Q1

1987Q1

1988Q1

1989Q1

1990Q1

1991Q1

1992Q1

1993Q1

1994Q1

1995Q1

1996Q1

1997Q1

1998Q1

1999Q1

2000Q1

2001Q1

2002Q1

2003Q1

2004Q1

2005Q1

2006Q1

2007Q1

2008Q1

2009Q1

2010Q1

2011Q1

2012Q1

Finan

cial Obligations as a Percent of DPI (%)

The financial obligations ratio consists of estimated required payments on outstanding mortgage and consumer debt plus automobile lease payments, rental payments on tenant-occupied property, homeowners’ insurance and property tax payments divided by disposable personal income.

9

Source: U.S. Census Bureau; data through August 2012.

Economic Data

Retail sales – pause in powerful recovery from 2008-09 recession

The recovery in retail sales was at odds with the widely accepted new normal hypothesis that consumer spending would be substantially constrained.

2012 summer soft patch followed by reacceleration.

Clear bands represent recession.

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

240

260

280

300

320

340

360

380

400

420

Jan‐00

Jun‐00

Nov‐0

0

Apr‐0

1

Sep‐01

Feb‐02

Jul‐0

2

Dec‐0

2

May‐0

3

Oct‐0

3

Mar‐0

4

Aug‐0

4

Jan‐05

Jun‐05

Nov‐0

5

Apr‐0

6

Sep‐06

Feb‐07

Jul‐0

7

Dec‐0

7

May‐0

8

Oct‐0

8

Mar‐0

9

Aug‐0

9

Jan‐10

Jun‐10

Nov‐1

0

Apr‐1

1

Sep‐11

Feb‐12

Jul‐1

2

$ billions

Retail Sales(monthly)

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

Lowest 20percent ($10,034)

Second 20percent ($26,966)

Third 20 percent($45,189)

Fourth 20 percent($71,220)

Highest 20percent

($150,144)

Income Quintiles (average income in parentheses)

Percent of Total Income After Tax

Percent of Total Consumer Spending

Economic Data

Personal income and spending by quintile

Because income and spending are skewed to the upper brackets, the recovery in spending growth is significantly a function of spending behavior in the higher brackets.

The top two income quintiles account for 62% of total spending; the bottom two account for 21%.

Sources: Bureau of Labor Statistics, Consumer Expenditure Survey. Data for 2010, released September 2011.

The Conference Board Leading Economic Index® (LEI) components: 1) average weekly hours worked, manufacturing; 2) average weekly initial unemployment claims; 3) manufacturers’ new orders – consumer goods and materials; 4) ISM index of new orders; 5) manufacturers’ new orders, nondefense capital goods; 6) building permits – new private housing units; 7) stock prices, S&P 500; 8) Leading Credit Index™; 9) interest rate spread; 10-year Treasury less fed funds; 10) index of consumer expectations.


“The economy continues to be buffeted by strong headwinds domestically and internationally. As a result, the pace of growth is unlikely to change much in the coming months.”

The Conference BoardSeptember 20, 2012

Economic Data

U.S. Index of Leading Economic Indicators (monthly)

50

60

70

80

90

100

110

120

Jan-86

Jan-87

Jan-88

Jan-89

Jan-90

Jan-91

Jan-92

Jan-93

Jan-94

Jan-95

Jan-96

Jan-97

Jan-98

Jan-99

Jan-00

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10

Jan-11

Jan-12

Inde

x (2

004=

100)

Clear bands indicate recession.

10

Sources: Bureau of Economic Analysis, actual data through June, 2012; Wall Street Journal survey taken September 7-11, 2012.

Economic Data

Gross Domestic Product (GDP) Growth

Economists see higher growth in the quarters immediately ahead.

-7

-5

-3

-1

1

3

5

7

9

1997-I 1997-III 1998-I 1998-III 1999-I 1999-III 2000-I 2000-III 2001-I 2001-III 2002-I 2002-III 2003-I 2003-III 2004-I 2004-III 2005-I 2005-III 2006-I 2006-III 2007-I 2007-III 2008-I 2008-III 2009-I 2009-III 2010-I 2010-III 2011-I 2011-III 2012-I 2012-III(E) 2013-I(E) 2013-III(E)

Q/Q

% c

hang

e(an

nual

ized

)

Actual and Forecast

Source: Wall Street Journal, February 8, 2012.

Economic Data

This is a big story – shale is re-industrializing America!

• The economic benefits of rising energy production are spreading far beyond the traditional oil patch …• Manufacturing plants are returning to the U.S. to take advantage of cheap natural gas, spurring major investments in petrochemical and steel production in the Gulf Coast and Midwest.• “We think lower natural gas prices are creating a structural economic advantage for the U.S. … it’s a new competitive strength for U.S. manufacturers … Asian companies paying up to six times what their competitors are paying in Texas and Louisiana.”• Consumers throughout the U.S. are paying lower bills for heating and electricity because of cheap natural gas. • Augusta ME consumers to switch to low‐cost gas from high‐cost home heating oil, keep local paper mills going.• The U.S. balance of payments is improving because of the new energy economy.• For every new job working in the oil and gas sector, another four are supported by the energy supply chain and by workers spending more money on goods and services (one economist’s estimate).• Consumer psychology: “People believe this is a game changer for the region”, resulting in more spending on dining out and entertainment.

Source: The Economist, April 21, 2012.

Economic Data

U.S. manufacturing renaissance?

“Labour costs are growing less and less important: a $499 first‐generation iPad included only about $33 of manufacturing labour, of which the final assembly in China accounted for just $8. Offshore production is increasingly moving back to rich countries not because Chinese wages are rising, but because companies now want to be closer to their customers so that they can respond more quickly to changes in demand. And some products are so sophisticated that it helps to have the people who design them and the people who make them in the same place. The Boston Consulting Group reckons that in areas such as transport, computers, fabricated metals and machinery, 10‐30% of the goods that America now imports from China could be made at home by 2020, boosting American output by $20 billion‐55 billion a year.”

11

Source: United Nations. Data through 2010. 1.8E+12 = 1.8 trillion.

Economic Data

Manufacturing value added by country

Brazil

China

India

Japan

U.S.

Western Europe

0

2E+11

4E+11

6E+11

8E+11

1E+12

1.2E+12

1.4E+12

1.6E+12

1.8E+12

1970

1971

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Constant 2005 Prices ($)

The U.S. is still the world’s largest manufacturer.

Source: United Nations. Data through 2010.

Economic Data

Share of global manufacturing value added by country

The U.S. has done a remarkably good job of holding share of global manufacturing against China’s onslaught.

Brazil

China

India

Japan

U.S.

Western Europe

0%

5%

10%

15%

20%

25%

30%

1970

1971

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Share of World M

anufacturing Value Added (%

)

1 FOMC’s August 1, 2012 meeting minutes. 2FOMC’s latest economic projections released with September 13, 2012 meeting minutes.Sources: Bureau of Labor Statistics; data through August 2012 (top chart). FRB St. Louis; data through March 2012 (bottom chart).

Federal Reserve’s personal consumption expenditures (PCE) inflation forecast.2

Economic Data

Benign Inflation Expected to Continue

“With crude oil prices expected to decline a bit from their current levels, the boost to retail food prices from the current drought in the Midwest anticipated to be only temporary and relatively small, longer‐run inflation expectations remaining stable, and substantial resource slack persisting over the forecast period, the staff continued to project that inflation would be subdued through 2014.”1

Fed's central tendency

forecast range

Actual

‐2

‐1

0

1

2

3

4

5

2002‐I

2002‐III

2003‐I

2003‐III

2004‐I

2004‐III

2005‐I

2005‐III

2006‐I

2006‐III

2007‐I

2007‐III

2008‐I

2008‐III

2009‐I

2009‐III

2010‐I

2010‐III

2011‐I

2011‐III

2012‐I

2012‐III

2013‐I

2013‐III

2014‐I

2014‐III

2015‐I

2015‐III

PCE Price Index

Percent Chan

ge Y/Y (%)

+1.7%

+1.9%

‐2

0

2

4

6

8

10

12

14

16

Jan‐70

Jan‐72

Jan‐74

Jan‐76

Jan‐78

Jan‐80

Jan‐82

Jan‐84

Jan‐86

Jan‐88

Jan‐90

Jan‐92

Jan‐94

Jan‐96

Jan‐98

Jan‐00

Jan‐02

Jan‐04

Jan‐06

Jan‐08

Jan‐10

Jan‐12

Percent Change Y/Y

CPI and Core CPI

12

“You’re in luck, in a way. Now is the time to be sick — while Medicare still has some money.”

Economic Data

Federal budget deficit

Source: Wall Street Journal, March 12, 2012.

Market Data

“Low interest rates disguise the federal debt bomb”

“ … the federal debt has soared during the Obama years, yet net federal interest payments are lower than they were in 2007 and lower than they were in nominal dollars even in 1997 when public debt was a mere $3.8 trillion.

… CBO adds that every 100 basis‐point rise in government borrowing costs over the next decade will trigger almost $1 trillion in new federal debt.”


Social Security


Economic Data

Federal debt

Source: Congressional Budget Office (CBO), The 2012 Long-Term Budget Outlook, June 5, 2012. 1 CBO's baseline revenue and spending projections reflect theassumption that current laws generally remain unchanged, implying substantial scheduled tax increases and spending cuts. The alternative fiscalscenario assumes that current policies are maintained, as opposed to current law, implying that lawmakers will extend most tax cuts and prevent thescheduled automatic spending cuts.

Revolutionary WarLouisiana Puchase Civil War WWI

Great Depression

WWII

Rising Deficits1980s

Alternative Fiscal

Scenario1

BaselineScenario1

0

20

40

60

80

100

120

1790

1800

1810

1820

1830

1840

1850

1860

1870

1880

1890

1900

1910

1920

1930

1940

1950

1960

1970

1980

1990

2000

2010

2020

% of GDP

Federal Debt Held by the Public% of GDP

Actual Forecast

13

Source: IMF, World Economic Outlook Database, April 2011. 1 Alternative fiscal scenario.


Social Security


Economic Data

Government debt-to-GDP ratios - comparative

0

20

40

60

80

100

120

140

160

Greece Japan Italy Portugal France UnitedKingdom

Ireland UnitedStates

Germany Spain Brazil Canada Australia

Deb

t / GDP (%)

2009

2010(E)

2011 (E)

This slide shows the IMF’s latest government debt‐to‐GDP ratios, actual and forecast. For now, the U.S. is better off than some. But, if we follow the AFS1 trajectory in the preceding chart the U.S. would become Portugal, then Italy.


Social Security


Economic Data

Projected federal spending – entitlements to grow >5%/year1

Source: Congressional Budget Office (CBO), The Budget and Economic Outlook: Fiscal Years 2012 to 2022, January 2012. CBO's baseline spendingprojections reflect the assumption that current law will not change. 1 CBO projects compound annual growth in GDP of 4.65% over the sameperiod.

0

1,000

2,000

3,000

4,000

5,000

6,000

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

($ billions)

CBO's Baseline Federal Spending Projectionsby category with compound annual growth rates in parentheses

Defense (+0.4%)

All other discretionary (+0.0%)


Social Security


Economic Data

Social Security – here’s the problem

Source: CBO’s 2011 Long-Term Projections for Social Security: Additional Information, August 2011.

Outlays

Tax Revenues

3.5

4.0

4.5

5.0

5.5

6.0

6.5

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

2015

2017

2019

2021

2023

2025

2027

2029

2031

2033

2035

2037

2039

2041

2043

2045

2047

2049

Percent of GDP (%)

Social SecurityRevenues and Outlays

Actual Projected

14

Source: Federal Reserve. Data through September 2012.

Market Data

Bond yields: record lows

10‐year Treasury

Aaa Index

Baa Index

0

2

4

6

8

10

12

14

16

18

20

1960‐01

1961‐01

1962‐01

1963‐01

1964‐01

1965‐01

1966‐01

1967‐01

1968‐01

1969‐01

1970‐01

1971‐01

1972‐01

1973‐01

1974‐01

1975‐01

1976‐01

1977‐01

1978‐01

1979‐01

1980‐01

1981‐01

1982‐01

1983‐01

1984‐01

1985‐01

1986‐01

1987‐01

1988‐01

1989‐01

1990‐01

1991‐01

1992‐01

1993‐ 01

1994‐01

1995‐01

1996‐01

1997‐01

1998‐01

1999‐01

2000‐01

2001‐01

2002‐01

2003‐01

2004‐01

2005‐01

2006‐01

2007‐01

2008‐01

2009‐01

2010‐01

2011‐01

2012‐01

Yield (%)

Market Data

Municipal Bonds

Source: Federal Reserve Bank, bond buyer GO 20-bond municipal bond index. Data through September 2012.

Municipals’ spread‐to‐Treasuries is attractive.

Municipal Bond Index

Muni spread over/under 10‐year Treasury

‐6

‐4

‐2

0

2

4

6

8

10

12

14

1960‐01

1961‐05

1962‐09

1964‐01

1965‐05

1966‐09

1968‐01

1969‐05

1970‐09

1972‐01

1973‐05

1974‐09

1976‐01

1977‐05

1978‐09

1980‐01

1981‐05

1982‐09

1984‐01

1985‐05

1986‐09

1988‐01

1989‐05

1990‐09

1992‐01

1993‐05

1994‐09

1996‐01

1997‐05

1998‐09

2000‐01

2001‐05

2002‐09

2004‐01

2005‐05

2006‐09

2008‐01

2009‐05

2010‐09

2012‐01

Source: Wall Street Journal, January 9, 2012. 1CNN Money, February 9, 2012 “Warren Buffett: Why stocks beat gold and bonds.”

Market Data

Stocks vs. Bonds

Warren Buffet1: “Today, a wry comment thatWall Streeter Shelby Cullom Davis made long agoseems apt:

15

Source: Wall Street Journal, August 1, 2012; Dow Jones Inc.; DJIA data through September 7, 2012.

Stock Market

September 2002:With DJIA at 7600 Bill Gross wrote "Dow 5000"

Dow Jones Industrial Average

August 2012:Bill Gross wrote "stocks operate

like a Ponzi scheme"

5,000

6,000

7,000

8,000

9,000

10,000

11,000

12,000

13,000

14,000

15,000

3‐Jan

‐00

3‐Ju

l‐00

3‐Jan

‐01

3‐Ju

l‐01

3‐Jan

‐02

3‐Ju

l‐02

3‐Jan

‐03

3‐Ju

l‐03

3‐Jan

‐04

3‐Ju

l‐04

3‐Jan

‐05

3‐Ju

l‐05

3‐Jan

‐06

3‐Ju

l‐06

3‐Jan

‐07

3‐Ju

l‐07

3‐Jan

‐08

3‐Ju

l‐08

3‐Jan

‐09

3‐Ju

l‐09

3‐Jan

‐10

3‐Ju

l‐10

3‐Jan

‐11

3‐Ju

l‐11

3‐Jan

‐12

3‐Ju

l‐12

Note how Bill Gross’ last big splash market call of 2002 turned out.

Source: Standard and Poor’s. Data through June 2012.

Stock Market Arithmetic

Total Return = 7% earnings-driven price + 3% dividends reinvested

S&P 500 Index

7% growthpath

S&P 500 Total Return (dividends reinvested)

10% growth path

70

700

7000

01/1970

03/1971

05/1972

07/1973

09/1974

11/1975

01/1977

03/1978

05/1979

07/1980

09/1981

11/1982

01/1984

03/1985

05/1986

07/1987

09/1988

11/1989

01/1991

03/1992

05/1993

07/1994

09/1995

11/1996

01/1998

03/1999

05/2000

07/2001

09/2002

11/2003

01/2005

03/2006

05/2007

07/2008

09/2009

11/2010

01/2012

Ratio Scale (1970 = 100)

If the cult of equity is dying among average investors, it’s probably because stocks have seemingly gone nowhere since 2000. That happened because market valuation got so overheated during the preceding bubble run from 1993 to 2000.

Market valuations having now spent over a decade coming back into line with underlying fundamentals, it seems to me that now is precisely not the time to declare the death of equities.

1 Nominal GDP. 2 Corporate profits after tax with inventory valuation and capital consumption adjustments. Source: U.S. Department of Commerce, Bureau of Economic Analysis. Data through March 2012.

Stock Market Arithmetic

GDP growth and earnings

Nominal GDP1

Corporate Profits2

7% growthpath

50

500

5000

I III I III I III I III I III I III I III I III I III I III I III I III I III I III I III I III I III I III I III I III I III I III I III I III I III I III I III I III I III I III I III I III I III I III I III I III I III I III I III I III I III I III I III I III I III I III I III I III I III I III I III I III I

19601961196219631964196519661967196819691970197119721973197419751976197719781979198019811982198319841985198619871988198919901991199219931994199519961997199819992000200120022003200420052006200720082009201020112012

Ratio Scale (1960=100)

What drives stock prices? Corporate profits.What drives corporate profits growth? GDP growth.Nominal GDP and profits growth have followed a 7% long‐term growth path.

Higher inflation that peaked in 1980 drove higher nominal GDP growth.

16

Economic data:

• Economists see continued economic expansion despite Europe.

• Slow but steady progress on new job formation.

• Consumers’ savings and liquidity have risen substantially.

• The “negative wealth effect” may be overestimated.

• Significant skew in income, spending is relevant to economic recovery. Retail sales have come roaring back.

• The U.S. economy is positioned to continue its +2½% to +3% long‐term trend rate of growth.

• Positive changes in manufacturing.

• Inflation is subdued and will probably remain so for at least a few years. Commodity inflation is transitory.

• The CBO projects massive budget deficits.

Market data:

• ECB’s bank bailout proposals have been catalysts for stocks; but Europe’s challenge is to build a stronger fiscal union.

• Better, and better‐than expected, U.S. economic news has been a catalyst for stocks.

• Stocks are still attractively valued on estimated earnings.

• Total return on bonds cannot continue recent years’ returns.

• Municipal bonds are attractive. “It’s just a correction.

The fundamentals are still good.”

Conclusions

“Winning is crucial to my retirement plans.”

Saving and Investing for Retirement

Saving and Investing for Retirement

Saving is key – the powerful arithmetic of compounding

A simple concept, maybe, but your children and grandchildren need to understand and appreciate the power of compounding.

If a 25 year-old managed to put away $10,000 in each of his first five working years - $50,000 total -he’d have over $600,000 by age 65.

More than 10 times the original amount saved!

$0

$100,000

$200,000

$300,000

$400,000

$500,000

$600,000

1 2 3 4 5 6 7 8 9 10111213141516171819202122232425262728293031323334353637383940

Year

Compounded Value @ 7% of $10,000 Saved in Each of Years 2012‐2016 ($50,000 total)

17

1 Published Dec. 19, 2011. 2 Big money center financials.3 Through August 13, 2012.

Consumer Discretionary

Consumer Staples Energy Financials

Health Care Industrials

Information Technology Materials

Telecom Services Utilities

Federated + - + - + + + -

Blackrock - + +

Barclays Capital - + - + + - -

Putnam -2 + +

Goldman Sachs - + - + - +

JPMorgan + - + + + + + - -

Citibank - + - + +

Morgan Stanley - + + - +

Prudential + - + + -

BofA Merrill Lynch + - + -

Net (+/-) 0 +1 +2 -5 +4 +1 +9 -2 +1 -2

Barron’s 2012 Forecast1

Survey of 10 stock market strategists’ sector picks and pans for 2012

Investment Strategy

Wall Street’s Call for 2012 – Should you take heed?

Actual 2012 Sector Returns YTD 3

(Rank)

+14%

(4)

+10%

(6)

+4%

(9)

+15%

(3)

+11%

(5)

+9%

(7)

+18%

(2)

+7%

(8)

+19%

(1)

+4%

(10)

Good call

Mistake Big Miss

Big Miss

Big Miss

Good call

1 Published Dec. 20, 2010. 2 Oil services. 3 Railroads4 These are S&P 500 sector returns for calendar 2011. Past performance is not a guarantee of future results.For Illustrative purposes only.





Telecom Services Utilities

Oppenheimer + + + - -

JP Morgan + + -

BofA Merrill + - + + + - -

Putnam - + - - + +

Credit Suisse - + - + - +

Morgan Stanley +2 +3 -

Barclays Capital - + - + + -

Wells Capital - + - + + + -

Goldman Sachs - + + - + -

UBS - + + - + + - -

Net (+/-) -1 -1 +6 0 -5 +6 +8 0 -2 -6

Barron’s 2011 Forecast1


Investment Strategy

Wall Street’s Call for 2011 – Heed Not the Talking Heads!

Big Mistake

Big Miss

Actual 2011 Sector Returns4

(Rank)

+4%

(4)

+11%

(2)

+3%

(5)

-18%

(10)

+10%

(3)

-3%

(8)

+1%

(6)

-12%

(9)

+1%

(7)

+15%

(1)

MistakeBig Miss

Miss Big Miss

1 Published Dec. 21, 2009. 2 Media.3 These are S&P 500 sector returns for calendar 2010. Past performance is not a guarantee of future results.For Illustrative purposes only.





Telecommunication Services Utilities

Blackrock - + + + -U.S. Trust - - + - + + + -Putnam - + + -Morgan Stanley +2 - + + -Wells Capital Management + - + - + + + -

Prudential - + - + + + -BofA Merrill - + + - + -Barclays - - + + +Goldman Sachs - + - + + - -JPMorgan - + + + -Citigroup + + - + -ISI Group - + + -Net (+/-) -2 -4 +4 0 -1 +7 +8 +5 -2 -8

Actual 2010 Sector Returns3

(Rank)

+26%

(1)

+11%

(7)

+18%

(4)

+11%

(6)

+1%

(10)

+24%

(2)

+9%

(8)

+20%

(3)

+12%

(5)

+1%

(9)

Big miss Big mistake

Good call

Good call

Good call

Investment Strategy

Wall Street’s Call for 2010 – two colossal mistakesBarron’s 2010 Forecast1


18

Investment Strategy

Wall Street’s trading mentality

David Swensen, PhD, Yale’s chief investment officer1:

Y: I was hoping you’d mention Cramer. In the new edition of Pioneering Portfolio Management, you write:“Educated at Harvard College and Harvard Law School, Cramer squanders his extraordinary credentials andshamelessly promotes stunningly inappropriate investment advice to an all‐too‐gullible audience.”

S: Jim Cramer exemplifies everything that’s wrong with the advice—and I put advice in quotation marks—that isgiven to individual investors. Investing is a serious business. We’re talking about retirement security of Americancitizens, and he turns it into a game. It’s a game where his listeners lose. It’s ridiculous. These high‐turnover,rapid trading strategies enrich the brokers. If you look at Jim Cramer’s approach on an after‐fee, after‐tax basis,the individual doesn’t have a chance. … Unconventional Success2 is a book for the overwhelming number ofindividual and institutional investors who cannot manage a portfolio actively. Almost everybody belongs on thepassive end of the continuum. A very few belong on the active end.

Y: Maybe we need new language, David. No one wants to be in the “passive” group.

S: No, they don’t. The basic problem is, it’s boring. The approach that I recommend is going to give youabsolutely nothing to talk about at a cocktail party. You’re going to be in a corner by yourself, and no one willpay any attention to you. But you’ll end up with a better‐funded retirement.

1 Yale Alumni Magazine, March/April 2009.2 Unconventional Success: A Fundamental Approach to Personal Investment, ©2005 Free Press, a division of Simon and Schuster, Inc.

Investment Strategy

Investors’ bad behavior – Dalbar’s 2012 QAIB

“’Over the years, there has been a huge gap betweenwhat [mutual‐fund] investors could have done versuswhat they put in their pocket,’ says Louis Harvey, CEOof Boston‐based investment research firm Dalbar. Thereason is most investors fail to hold mutual‐fundinvestments for long enough, and instead try to timetheir investments. But they tend to enter the marketafter it has risen, Mr. Harvey says. So they are likelybuying at a higher price. They also are apt to leave themarket after it has dropped, therefore selling at alower price. The result: investments that will massivelyunderperform against their benchmarks. The averageequity‐fund investor saw annual returns of only 3.49%in the 20 years through 2011, according to the latestanalysis from Dalbar. Compare that with the average7.81% annual return of the S&P 500.2

1©Quantitative Analysis of Investor Behavior prepared by Dalbar, Inc. April 2012 www.dalbar.com. Dalbar offers a $99 version of this study for financial advisors’ distribution to clients and/or posting on their password-protected websites. 2Wall Street Journal, April 7, 2012.

Excerpt:1

Investor Irrationality on DisplayThe following charts illustrate that investors continue to react to market movements and the news. One of the most startling andongoing facts is that at no point in time have average investors remained invested for sufficiently long periods to derive the benefitsof the investment markets. … The result is that the alpha created by portfolio management is lost to the average investor, whogenerally abandons investments at inopportune times, often in response to bad news.

Investment Strategy

Investors’ classic capitulation – “Modern Portfolio Theory is dead”

600

700

800

900

1000

1100

1200

1300

1400

1500

1600

Jan‐07

Mar‐0

7

May‐0

7

Jul‐0

7

Sep‐07

Nov‐0

7

Jan‐08

Mar‐0

8

May‐0

8

Jul‐0

8

Sep‐08

Nov‐0

8

Jan‐09

Mar‐0

9

May‐0

9

Jul‐0

9

Sep‐09

Nov‐0

9

Jan‐10

Mar‐1

0

May‐1

0

Jul‐1

0

Sep‐10

Nov‐1

0

Jan‐11

Mar‐1

1

May‐1

1

Jul‐1

1

Sep‐11

Nov‐1

1

Jan‐12

Mar‐1

2

S&P 500 Index

Barron’s“Modern Portfolio Theory Ages Badly – The death of buy‐and‐hold.” 2/16/09Wall Street Journal“More Investors Say Bye‐Bye to Buy‐and‐Hold” 4/8/09“Advisers Ditch ‘Buy and Hold’ For New Tactics” 4/29/09

19

Investment Strategy

Modern Portfolio Theory

“Your mother called to remind you to diversify.”

Wall Street strategists’ dismal track record with their S&P 500 sector recommendations illustrates howextremely difficult it is to systematically add α with tactical asset allocation – ie. trying to guess which sectors,styles, markets (foreign vs. domestic) or asset classes ( eg. stocks, bonds, commodities, gold, etc.) are going tooutperform and which are going to lag. In my opinion, MPT is still the best investing mousetrap yet devised.

Asset allocation and diversification do not guarantee a profit or eliminate the risk of loss.Source: Riskglossary.com

Modern portfolio theory was introduced by Harry Markowitz with his paper “Portfolio Selection,” which appeared in the 1952 Journal of Finance.

Thirty-eight years later, he shared a Nobel Prize with Merton Miller and William Sharpe for what has become a broad theory for portfolio selection.

Modern Portfolio Theory

Diversify

Optimize

Rebalance

Investment Strategy

Modern Portfolio Theory = Asset Allocation

Investment Strategy

Asset Allocation — An ExampleLet’s construct a global balanced portfolio using 7 asset classes …

Large U.S. Stocks

Small U.S. Stocks

Non-U.S. Stocks

Bonds

Cash

Real Estate

Commodities

Stocks (43%)

Bonds (14%)

Cash (14%)

Real Estate (14%)

Commodities (14%)

Source: ©2012 The 7Twelve ™ Portfolio powerpoint presentation, by Craig Israelsen. Used with permission. Indexes used in this illustration: Large‐cap USequity represented by the S&P 500 Index. Small‐cap US equity represented by the Ibbotson Small Companies Index from 1970‐1978, and the Russell 2000Index starting in 1979. Non‐US equity represented by the MSCI EAFE Index. Real estate represented by the NAREIT Index from 1970‐1977 and the Dow JonesUS Select REIT Index starting in 1978.Commodities represented by the Goldman Sachs Commodities Index (GSCI). As of February 6, 2007, the GSCI became theS&P GSCI Commodity Index.U.S. Aggregate Bonds represented by the Ibbotson Intermediate Term Bond Index from 1970‐75 and the Barclays CapitalAggregate Bond index starting in 1976. Cash represented by 3‐month Treasury Bills.

20

Investment Strategy

Asset Allocation — An Example

50

500

5000

1969

1970

1971

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Index (1/1/70=100)

(logarithmic scale)

Large US Equity

Small US Equity

Non‐US Equity

Aggregate US Bonds

Cash

Real Estate

Commodities

Equally Weighted Diversified Portfolio

1Compound annual growth rate.

Past performance is not a guarantee of future results. An investment cannot be made directly in the indexes used in this illustration.Source: ©2012 The 7Twelve ™ Portfolio powerpoint presentation, by Craig Israelsen. Used with permission. Indexes used in this illustration: Large‐cap USequity represented by the S&P 500 Index. Small‐cap US equity represented by the Ibbotson Small Companies Index from 1970‐1978, and the Russell 2000Index starting in 1979. Non‐US equity represented by the MSCI EAFE Index. Real estate represented by the NAREIT Index from 1970‐1977 and the Dow JonesUS Select REIT Index starting in 1978.Commodities represented by the Goldman Sachs Commodities Index (GSCI). As of February 6, 2007, the GSCI became theS&P GSCI Commodity Index.U.S. Aggregate Bonds represented by the Ibbotson Intermediate Term Bond Index from 1970‐75 and the Barclays CapitalAggregate Bond index starting in 1976. Cash represented by 3‐month Treasury Bills.

S&P 500 CAGR1 = +9.8%

Diversified Portfolio CAGR1 = +10.3%

Investment Strategy

Asset Allocation — MPT has delivered

Large US Stocks

SmallUS Stocks

Non‐USStocks

Aggregate US Bonds

Cash

Real Estate

Commodities

Equally Weighted Diversified Portfolio

4

5

6

7

8

9

10

11

12

0 5 10 15 20 25 30

Compound Annual Return (%

)

Standard Deviation of Annual Returns (%)

Risk vs. Return by Asset Class1970‐2011

Bank Loan, Bear Market Commodities Broad Basket, Communications Conservative Allocation Consumer Discretionary, Consumer Staples Convertibles, Currency, Diversified Emerging MktsDiversified Pacific/Asia, Emerging Markets Bond Equity Energy, Equity Precious Metals Europe Stock, Financial Foreign Large Blend, Foreign Large Growth Foreign Large Value, Foreign Small/Mid Growth Foreign Small/Mid Value, Global Real Estate Health, High Yield Bond, High Yield Muni Industrials, Inflation-Protected Bond Intermediate Govt’ Bond Intermediate-Term Bond, Japan Stock, Large Blend Large Growth, Large Value, Latin America Stock Long Government, Long-Short, Long-Term BondMid-Cap Blend, Mid-Cap Growth, Mid-Cap Value Miscellaneous Sector, Moderate Allocation Multisector Bond Muni National Interm, Muni National Long Muni National Short, Muni Single State IntermMuni Single State Long, Muni Single State Short Natural Resources, Pacific/Asia ex-Japan Stk, Real Estate Retirement Income, Short Government Bond Short-Term Bond, Small Blend, Small Growth Small Value Target Date 2000-2010 Target Date 2011-2015; 2016-2020; 2021-2025 Target Date 2026-2030; 2031-2035; 2036-2040 Target Date 2041-2045; Target Date 2050+ Technology, Ultrashort Bond, Utilities, World Allocation,

World Bond, World Stock

Active23/73

Neutral28/73

Passive22/73

73 Fund Categories Analyzed

1 ©FundQuest BNP Paribas Group study dated June 2010, Jane Li, author. “When Active Management Shines vs. Passive – Examining Real Alpha in 5 full market cycles over the past 30 years.”

“Out of the 73 categories in our study, we recommend a bias to active management in 23 categories and a bias to passive management in 22 categories. Twenty‐eight (28)

categories were deemed neutral.”

Investment Strategy

FundQuest BNP Paribas Study1

21

And Don’t Believe Everything You Hear

A study by Media Research Center of a year’s worth of economic coverage on ABC, CBS and NBC found more than twice as many stories and briefs focused on negative aspects of the economy (62%) compared to good news (31%).

Source: Media Research Center, “Bad News Bears,” October 2006.

“We were wondering if now would be a good time to panic?”

the view from the fiscal cliff: economic update and ... · 3 stock market barely-believed bull –...

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