MARKET SIGNALS

Source: The New Yorker

THE MATERIAL COVERED IN THIS PRESENTATION IS

THE OPINION OF THE PRESENTER AND SHOULD

NOT BE CONSTRUED AS A RECOMMENDATION TO

BUY OR SELL ANY OF THE SECURITIES MENTIONED.

INVESTORS SHOULD SEEK THE COUNSEL OF THEIR

FINANCIAL ADVISOR BEFORE MAKING ANY KIND

OF INVESTMENT. THE PRESENTER MAY OR MAY

NOT HOLD LONG OR SHORT POSITIONS IN ANY

OF THE SECURITIES MENTIONED.

The FactsWe are not entering another Great Depression. Following the Stock Market crash of 1929 the government:•Raised taxes

•Increased interest rates

•Increased Tariffs

•Slowed Government Spending

A Typical Recession• Averages 14 months in length.

• Economic activity declines by 2.5%.

• Before this, we’ve had two recessions in the last 30 years (early 1990’s and 2000 –2001).

• They always end and the economy always rises to a higher plateau.

Source: U. S. Department of Economic Advisors

Since World War II, the U.S. economy has experienced 11 recessions

• 27 stock declines of 10% or greater

• 14 stock declines of 20% or greater

Source: Standard & Poor’s

We’ve Been Through This Before

HIRING FREEZE:New College Graduates To Be Cryogenically

Frozen Until Job Market Improves

Source: The Onion

The Root of the Problem•We have about 1.5 million too many homes. (This is about 12 months worth of sales)

• Much of the problem is regionally based

• A dramatic slowdown in building and an increase in housing affordability is what eventually will solve the problem.Source: Warren Buffett

Paying it Down• Higher Taxes• Changes To Entitlement

Programs• Higher Revenue from a

Rebounding Economy

Direction Counts

Source: Wells Capital Management

Interest Burden

Profits Count, A Lot!Since WW II

• Corporate profits up 110 fold

• Stock prices have risen 81 foldSource: Standard & Poor’s

Energy Issues• Prices will remain stubbornly high• Demand Strong – Especially China and

India• Supply Weak –

•An inverse relationship between oil prices and world peace?

Source: Tulane Energy Studies Department

New Refineries?

• NIMBY• BANANA• NOPE

Natural Gas… Our Future Fuel

•It’s clean burning and cheap relative

to oil.

•Natural Gas can be used to; heat homes,

power cars, cook, and generate

electricity.

-Non-OPEC oil production peaks in 2010.

-Non-OPEC gas production peaks in 2040

Source: Tulane Energy Studies Department

Gulf Coast WetlandsOf Critical Importance:

•1/3 of the nation’s energy production

•Bulk of Country’s refining capacity

•30% of America’s Seafood

•South Louisiana is the Nation’s largest port

•Wetlands are a buffer against storms

Source: Louisiana Dept. of Economic Development

The Yield Curve As Prophet Fall 20003 month 6.00% 10 year 5.70%Slope: -30 basis pointsPredicting a sharp decline in corporate earnings.

Summer 20033 month 0.95% 10 year 4.35%Slope: +340 basis pointsPredicting a huge increase in corporate earnings growth.

Fall 20063 month 5.10% 10 year 4.50%Slope: -60 basis pointsSource: Bloomberg

Current Slope +260 Basis PointsTen year treasury note (2.75%) minus

3-month treasury bill (0.15%)

Source: Bloomberg

BUMPY RIDE …GOING NOWHERE

Woe To That E-Trade Baby!

Something to Chew On•401K Accounts have been rising for over a year.

•House prices are up in each of the last several months

•Unemployment statistics are slowly getting better.Source: Case-Schiller Index

Change of Heart•In 2000 stocks were overpriced and investors were “irrationally exuberant”

•Today, stocks are underpriced and investors are “irrationally pessimistic”

•Stock prices are down 25%

•S&P earnings are twice as high

•Interest rates are down more than 50%

Ups and Downs

Source: U. S. Department of Economic Advisors

Economic Recovery

Source: U. S. Department of Economic Advisors

Another Look•Investors seem to be virtually ignoring that the economy is improving and corporate earnings are better than expected

•Instead they are focused on the negative news like the troubles in Europe and the oil spill in the Gulf

GULF PROBLEMS

Marginal Income Tax

Lou Dobbs Hosts MoneylineFrom Window Ledge

Source: www.theonion.com

HEADLINE:

Typical Recovery• Painful Layoffs

• Credit Markets Gradually Thaw. The spreads between treasury and corporate bond yields have narrowed.

• Small Improvement in Business Brings Much Larger Improvement in Profits

• M&A Activity Heats Up

Merger Activity• Disney to buy Marvel

Entertainment

• Baker Hughes to buy BJ Services

• Kraft to buy Cadbury • Dell buys Perot Systems• TYCO buys Brinks Security

Financial Myth Busting• High Unemployment

A Good Time For Stocks?•Unemployment rates above 6.6%Annualized stock returns = +20.43%

•Unemployment rates below 6.6%Annualized stock returns +7.34%Source: Jim Paulsen – Wells Capital Management Data from 1948 to 2009

Financial Myth Busting• High Unemployment • Most Americans think we are on

the “wrong track”

If a Majority of the People…• In the early 1990’s 2/3rd’s of

Americans felt the country was on the wrong track…

• In 2000 80% of Americans believed the country was on the right track…

Source: Wells Capital Management

Financial Myth Busting• High Unemployment • Most Americans think we are on the

“wrong track”• There is too much leverage • There is a Democrat in the White

House

Where To? • Share Buybacks• Increased Dividends• Mergers & Acquisitions • Much Needed Capital

Expenditures• Hiring?

Financial Myth Busting• High Unemployment • Most Americans think we are on the

“wrong track”• Companies are leveraged • There is a Democrat in the White

House

Political Performance Standard & Poor’s 500

‐40 ‐20 0 20 40 60 80 100 120

Obama's First Term through 6/15/10

Clinton's Second Term

Clinton's First Term+99%

+83%

+42%

-26%

-6%

Bush’s Second Term

Bush’s First Term

Worker Blues• THE BAD NEWS: 40% of the

Country’s skilled workers will be eligible for retirement in 2010.

• THE GOOD NEWS?: Thanks to declining 401K accounts most everyone will keep coming to work.

• PERHAPS consider a “sabbatical”

Mason-Dixon Line Renamed IHOP-Waffle House Line

Source: www.theonion.com

HEADLINE:

The Next Bubbles? • GOLD• Unlike other commodities, virtual every

ounce ever produced is still around. We’re mining more every year.

• Perhaps the only reason that Gold is valuable is that we believe it is valuable

• BONDS• Outrageously priced with little room for

increases in interest rates and/or inflation Source: BARRONS

Investment Summary• Early Stages of a New Business Cycle.• Investors are “Under Invested” in

equities.

Choices: - 0% return in the bank- 3% return in longer term bonds- Growing companies at 12-13x earnings,

some with attractive dividend yields.

Not An EconomicClunker

•The U.S. is the largest and mostproductive economy in the world(4.6% of the world’s population producing 25% of the world’s output)

•U.S. Economy is Larger than Japan, China and Germany combined.

•China’s growth is mainly at the expense of Japan, South Korea and Mexico, not the U.S.Source: BARRONS

Not An Economic Clunker•U.S. is the world’s largest exporter of goods and services.

•We attract more foreign investment capital than any other nation.

•The finest higher education system in the world….by far

•A culture of technology and innovation second to none!Source: BARRONS

Not An Economic Clunker•This time the economic recovery will be led by other countries.

•Don’t Sell The U.S. Short

•Litmus Test For a Nation!

Three Stages of a Bear Market

Stage Characteristics

1. DENIAL Economy shows signs of slowing and stocks fall from their highs, sometimes sharply. Investors shrug it off and act as though the bull market will last forever.

2. REALITY Stocks continue to decline. Investors start to realize how weak the economy really is.

3. SURRENDER Fear of deeper losses and a recession become so worrisome that investors give up on stocks, setting the stage for a rebound.

Started In Economic Downturns

• Procter & Gamble: The Panic of 1837

• General Electric: The Panic of 1893

• General Motors: The Panic of 1907

• United Technologies: The Great Depression 1929

• Fed Ex: The Oil Crisis of 1973

• Microsoft: 1973 – 1974 RecessionSource: Wikipedia

The Future Has Not Been Cancelled

• Our economic problems are not insurmountable.

• The third year of a Presidential Term is often the best for stocks.

• Have patience, this turnaround will not happen overnight.

• Capitalism Works. The human drive to succeed is very powerful.

Great Reading/SourcesPopular BooksOne Up On Wall Street, Peter Lynch (Simon & Schuster)A Zebra in Lion Country, Ralph Wanger (Simon & Schuster)The Money Masters, John Train (Harper & Row)The Little Book That Beats The Market, Joel Greenblatt

Analytical BooksThe Intelligent Investor, Benjamin Graham (Harper & Row)Security Analysis, Benjamin Graham (McGraw-Hill)

Sophisticated and Well WrittenCommon Stocks and Uncommon Profits, Phillip A. Fisher (Harper & Row)The Contrarian Investment Strategy, David Dremen (Random House)Great Investment WebsitesBloomberg.com Investopedia.com NPR.org (Planet Money)MotleyFool.com Seekingalpha.com YahooFinance.com

www.burkenroad.org