Valuation Risk01 April 2015

War Room

HiddenLevers War Room

Open Q + A

Macro Coaching

Archived webinars

CE Credit

Idea Generation

Presentation deck

Product UpdatesScenario Updates

Market Update

Valuation Risk 101

Scenarios: S&P Valuation

Valuation Risk

HiddenLevers

MARKET UPDATE

Fed limits rate hike reach

Market Update

Euro = hot knife through butter

UK inflation = 0

sources: HiddenLevers,

1.05 support / Nov 1999 / Mar 2015

1

3

2

Market UpdateOil bust = Oil jobs bust, but Non-Farm Payrolls up up up

sources: HiddenLevers, Federal Reserve Dallas, NY Times, Forbes, CNBC ,USA Today

4

300k jobs added in Feb

HiddenLevers

VALUATION RISK 101

Valuation Risk 101: Three Methodologies

sources: HiddenLevers, Investopedia 1 2

CAPE

Cyclically Adjusted P/E Ratio (Shiller P/E)

Uses inflation-adjusted earnings over a decade for “E” in P/E ratio.

Corrects for issues with traditional P/E, which is affected by volatile quarterly earnings.

Long term average is 16x

Q Ratio

The total market cap in an economy divided by the asset replacement cost of all companies in that economy.

If ratio is below 1, then replacement cost exceeds market cap.

If ratio is above 1, then market cap exceeds replacement cost.

ECB

S&P Long-Term Trend

Creates a regression trend line to indicate the long-term average return.

S&P has spent decades above or below the trend line (below in the 1980s, above in the 2000s).

Assetbased

Technicalsbased

P/Ebased

Valuation Risk 101: Public Market Frothiness

source: Advisor Perspectives

1929Black Tuesday

2007 Pre Financial Crisis

2015 valuation multiples eclipsed 2007, now approaching 1929

2000Dot Com

Market Update – Ebola Pandemic

sources: HiddenLevers, CB Insights, VentureBeat, Fortune

Valuation Risk 101: Private Market Frothiness

Unicorns:- zeitgeist term for late stage VC funded tech startups- staying private for longer due to available backers- 100m+ funding rounds without SEC level scrutiny

2015IPO market < Late Stage Private

Mega-Financings ($100M+)

Unusual suspects for late stage private- mutual funds- hedge funds- sovereign wealth- corporates

Top 10 most active 100m+ round investors#1 T. Rowe Price#4 Kleiner Perkins#4 Andreesen Horowitz#7 Fidelity

201070

2014300

I do think you’ll see some dead unicorns this year – Bill Gurley, top startup Investor

Valuation Risk 101: Crash Comparison

source: HiddenLevers, RFS Advisors

Bear Market Period Duration(Months) % Decline

Sep 1929 - June 1932 33 86.7

July 1933 - Mar 1935 20 33.9

Mar 1937 - Mar 1938 12 54.5

Nov 1938 - Apr 1942 41 45.8

May 1946 - Mar 1948 22 28.1

Aug 1956 - Oct 1957 14 21.6

Dec 1961 - June 1962 6 28.0

Feb 1966 - Oct 1966 8 22.2

Nov 1968 - May 1970 18 36.1

Jan 1973 - Oct 1974 21 48.2

Nov 1980 - Aug 1982 21 27.1

Aug 1987 - Dec 1987 3 33.5

July 1990 - Oct 1990 3 19.9

July 1998 - Oct 1998 3 21.2

Mar 2000 - Oct 2002 31 49.1

Oct 2007 - Mar 2009 17 56.8

Average Drop: 38.3%

Average Duration:

18 Months

HiddenLevers

SCENARIOS: S&P VALUATION

S&P Valuation: Correct Historical Analogue?

UGLY:• Drop to long

term average valuation• Slightly above

2009 levels

GOOD:• 1990s boom = outlier• 1920s a better comparison• 20% upside remaining

BAD:• A more typical correction• Drop to 2003 valuation level

GOOD: Roaring 1920s Multiples

source: HiddenLevers

tech boom + low rates lead S&P higher

new industrial revolution

deflation remains benign

low ratespermanent

inequality high

BAD: 2003 Recession Multiples

Unicornsimplode

standard correction, not 2008 financial crisis

source: HiddenLevers

commodities already

took the hit

volatility = directional

change

rate hike Fed keeps

its word

UGLY: Long Term Trend

jobs picture changes

source: HiddenLevers

return to USD inverse correlation

rate hike Fed eats its words

S&P reversion to mean = gravitational pull

commodities down

further

Scenario: S&P Valuation

S&P1300 -38%

S&P1600 -22%

S&P2500 +20%

key lever

Correction will come, but still room to run in this bull if mirrors 1920s.

Hard technical support at 2007 peak and a typical correction. Fed keeps rate hike intact. No recession.

Fed would roll back rate hike instantly. True recession that affects main street.

Good1920s Era

(32 PE)

Bad2003

Recession(21 PE)

UglyLong Term

Trend(16 PE)

S&P Valuation: Take-Aways

commodities have already corrected

permanently low rates means nowhere to go but equities

late 1990s P/E = outlierdon’t conflate because of Nasdaq 5k

S&P is 70% above long term P/E

Dude, who

needs a day

job?

Product Update

custom benchmarks

integrationLPL

BranchNet

makeoverrisk profile

integrationFolio

Institutional