do not distribute without consent from author · - jesse livermore $100mm: equities 1 year focused...

150+ Years of Cross-Capital Investing

Professor Joel Litman

Chief Investment StrategistValens Securities, Valens Credit

Do Not Distribute Without Consent From Author

“There is nothing new in Wall Street.”

“There can't be because speculation is as old as the hills. “

“Whatever happens in the stock market today has happened before and will happen again.”

- Jesse Livermore

$100MM: Equities 1 year

Focused on credit

1907 1925 1929Do Not Distribute Without Consent From Author

China (2008 Peak)


ADX

2007 to

2010


BEAR CYCLEBULL CYCLE

Market Bubble

Capitulation

Bear Rally

First

Stage

Bull

Second

Stage

Bull

Double Top

CREDIT EASINGCREDIT EASING CREDIT TIGHTENING

Credit Demand FallingCredit Demand Increasing

DivestingNet New Investing


<->

?


CDS vs. Avg Credit Rating1,216 Companies Worldwide with CDS and Credit Rating

0.00

500.00

1,000.00

1,500.00

2,000.00

2,500.00

3,000.00

3,500.00

4,000.00

4,500.00

0 . 0 0 2 5 . 0 0

Credit Rating from AAA+ to C-

Cre

dit

De

fau

lt S

wa

p

(5 Y

r b

ps

) 2

00

8 F

eb

8

AAA C

June 18, 2008 Presentation


Moody’s Credit OpinionJ.C. Penney Company, Inc. (NYSE:JCP)Moody’s Rating: Caa2 (HY3) Valens Credit Rating: IG4 (Baa2)

Source: Credit Opinion, Moody’s Investors Service, May 15, 2013


KENNEBEC RIVER CAPITAL | PRIVATE AND CONFIDENTIAL PAGE 14

Credit Cash Flow Prime™GAAP Distortions, Transparency

Cross-Capital Analytics™Equity Performance and Valuation Prime

Financial Red Flags™ Forensic AccountingForemost Financial Statement Expertise in the World

Management Representation BenchmarkingAudio, Linguistic, Cognitive & Emotion Analysis™

Incentives Dictate Behavior™Debt-Related Corporate Governance

Aggregate Analytics™Leading & Coincident Economic Indicators

Unbiased Research… Non-limited Research


Valens Credit J.C. Penney Company, Inc. (NYSE:JCP)Moody’s Rating: Caa2 (HY3) Valens Credit Rating: IG4 (Baa2)

Source: Valens Credit



Market Bubble

Capitulation

Bear Rally

First

Stage

Bull

Second

Stage

Bull

Double Top




PROFIT COLLAPSINGCORPORATE PROFIT INCREASING

MULTIPLE EXPANSION MULTIPLE COMPRESSION

LEADING AND LAGGING ECONOMIC INDICATORS

BEAR SENTIMENTBEAR SENTIMENT BULL SENTIMENTPanicDisinterest Hope Mania Despair


“Without the firm handle on that flexibility that credit analysis provides,

…we'd argue you can't fully understand the wealth-creation process as an equity investor.”

Mitchell JulisCanyon Capital


Market Commentary

CONFIDENTIAL

CONFIDENTIAL

NYSSA:

Cross-Capital Investing

Professor Joel Litman

June 18, 2008

Prepared for your use only. This document has been prepared for your information and use only. It should only be distributed to other members of your organization on a need-to-know basis and is not meant for distribution or dissemination to any other person or entity.Do Not Distribute Without Consent From Author

High Yield (CDX HY)

200

250

300

350

400

450

500

550

600

Dec-06 Jan-07 Feb-07 Mar-07 Apr-07 May-07 Jun-07 Jul-07 Aug-07 Sep-07 Oct-07 Nov-07 Dec-07 Jan-08

Date

(CD

X H

Y)

Mo

nth

En

d C

lose

Investment Grade (CDX IG)

20

30

40

50

60

70

80

90

100


Date

(CD

X I

G)

Mo

nth

En

d C

los

e

S&P 500

1350

1370

1390

1410

1430

1450

1470

1490

1510

1530

1550


Date

S&

P 5

00 M

on

th E

nd

Clo

se

250bps

30bps

1410

CDS for High Yield

CDS for Investment Grade

SP500 monthly closing

550bps

100bps

1380

Dec 2006 Jan 2008

Dec 2006 Jan 2008



CDS Indices in North America and Europe

Markit data as of 2008 02 18




Market Bubble

Capitulation

Bear Rally

First Stage Bull

Second StageBull

Double Top







CASH, SHORT, OR TRADEBUY AND HOLDShortAccumulate Momentum Buy, Trade Trade



-40

-20

0

20

40

60

80

100

0

200

400

600

800

1000

1200

1400

1600

1800

20001

/1/1

99

0

1/1

/19

91

1/1

/19

92

1/1

/19

93

1/1

/19

94

1/1

/19

95

1/1

/19

96

1/1

/19

97

1/1

/19

98

1/1

/19

99

1/1

/20

00

1/1

/20

01

1/1

/20

02

1/1

/20

03

1/1

/20

04

1/1

/20

05

1/1

/20

06

1/1

/20

07

1/1

/20

08

1/1

/20

09

1/1

/20

10

1/1

/20

11

1/1

/20

12

1/1

/20

13

1/1

/20

14

Credit Standards and the S&P 500: January 1990 to

Recession S&P 500 Credit Tightening

May 2014

Source: Senior Loan Officer OpinionSurvey,

U.S. Federal Reserve Board


200000

400000

600000

800000

1000000

1200000

1400000

1600000

1800000

Commercial and Industrial Loans Consumer Loans

Data Frequency - Weekly - January 1980 to June 25, 2014

0

200

400

600

800

1000

1200

1400

1600

1800

2000

2200

2-Ja

n-80

2-Ja

n-82

2-Ja

n-84

2-Ja

n-86

2-Ja

n-88

2-Ja

n-90

2-Ja

n-92

2-Ja

n-94

2-Ja

n-96

2-Ja

n-98

2-Ja

n-00

2-Ja

n-02

2-Ja

n-04

2-Ja

n-06

2-Ja

n-08

2-Ja

n-10

2-Ja

n-12

2-Ja

n-14

S&P 500


0

200

400

600

800

1,000

1,200

1,400

3/5/2010 9/5/2010 3/5/2011 9/5/2011 3/5/2012 9/5/2012 3/5/2013 9/5/2013 3/5/2014

bp

s

IG XO HY

Valens Custom Aggregate CDS Index

Data Date: Four Years through July 4, 2014


Corporate Credit Since 2004

0

0.5

1

1.5

2

2.5

3

0

50

100

150

200

250

300

350

400

1/2/

04

4/2/

04

7/2/

04

10/2

/04

1/2/

05

4/2/

05

7/2/

05

10/2

/05

1/2/

06

4/2/

06

7/2/

06

10/2

/06

1/2/

07

4/2/

07

7/2/

07

10/2

/07

1/2/

08

4/2/

08

7/2/

08

10/2

/08

1/2/

09

4/2/

09

7/2/

09

10/2

/09

1/2/

10

4/2/

10

7/2/

10

10/2

/10

1/2/

11

4/2/

11

7/2/

11

10/2

/11

1/2/

12

4/2/

12

7/2/

12

10/2

/12

1/2/

13

4/2/

13

7/2/

13

10/2

/13

1/2/

14

4/2/

14

7/2/

14

Equity Returns (Indexed)#

of F

irms w

ith C

DS <

=100

bps

# Firms with CDS <= 100bps

IG Indexed Returns

S&P500 Indexed Returns

HY Indexed Returns


0%

2%

4%

6%

8%

10%

12%

14%

16%

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 YTD

Cas

h a

s %

of

Tota

l Ass

ets

Cas

h &

Inve

stm

en

ts (

$U

S Tr

illio

ns)

Corporate Cash Holdings

Cash and ST Investments (Left Axis)

Cash as % of Total Assets (right axis)

Source: S&P CapitalIQ. Valens AnalysisUSA Largest 1,000 companies by market cap. (ex financials, utilities and insurance). Cash includes short and long-term marketable securitiesData Date: 5/05/2014 Do Not Distribute Without Consent From Author

0

2

4

6

8

10

12

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

His

tro

ic S

&P

50

0 A

ggre

gate

In

tere

st R

ate

Co

vera

ge

Aggregate EBITAP/Interest Expense


0%

20%

40%

60%

80%

100%

120%

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 YTD

Re

cove

rab

le A

sset

s /

Tota

l De

bt

Aggregate Recovery Rate

Source: S&P CapitalIQ. Valens AnalysisUSA Largest 1,000 companies by market cap. (ex financials, utilities and insurance). Total Assets on the Balance SheetRecovery Rate as defined by (1*Cash + 0.8*Total. Rec + 0.6*Inventory + 0.6*Other CA - 1*CL + 0.4*GPPE + 1*Other LT Investments) / Total Adjusted Debt



Market Bubble

Capitulation

Bear Rally

First Stage Bull

Second StageBull

Double Top










0

1

2

3

4

5

6

7

8

9

10

0.0

2.0

4.0

6.0

8.0

10.0

12.0

Jan

-48

Jul-

50

Jan

-53

Jul-

55

Jan

-58

Jul-

60

Jan

-63

Jul-

65

Jan

-68

Jul-

70

Jan

-73

Jul-

75

Jan

-78

Jul-

80

Jan

-83

Jul-

85

Jan

-88

Jul-

90

Jan

-93

Jul-

95

Jan

-98

Jul-

00

Jan

-03

Jul-

05

Jan

-08

Jul-

10

Jan

-13

Civilian Unemployment Rate


Source: Liz Ann Sonders, Charles Schwab, Market Outlook February 2011


Disciplined, systematic financial analytics

create a foundation for

reliable aggregate indicators


MEASURING BUSINESS PROFITABILITY

AND VALUATION LEVELS


MEASURING BUSINESS PROFITABILITY

AND VALUATION LEVELS

Garbage In, Garbage Out



Market Bubble

Capitulation

Bear Rally

First

Stage

Bull

Second

Stage

Bull

Double Top




Earnings is a problematic indicator (leading vs lagging)

S&P 500 Earnings and Performance

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

$1,800

12/3

1/1

988

09/3

0/1

989

06/3

0/1

990

03/3

1/1

991

12/3

1/1

991

09/3

0/1

992

06/3

0/1

993

03/3

1/1

994

12/3

1/1

994

09/3

0/1

995

06/3

0/1

996

03/3

1/1

997

12/3

1/1

997

09/3

0/1

998

06/3

0/1

999

03/3

1/2

000

12/3

1/2

000

09/3

0/2

001

06/3

0/2

002

03/3

1/2

003

12/3

1/2

003

09/3

0/2

004

06/3

0/2

005

03/3

1/2

006

12/3

1/2

006

09/3

0/2

007

06/3

0/2

008

03/3

1/2

009

12/3

1/2

009

09/3

0/2

010

06/3

0/2

011

03/3

1/2

012

12/3

1/2

012

S&

P 5

00 P

rice

$0

$10

$20

$30

$40

$50

$60

$70

$80

$90

$100

S&

P 5

00 E

arn

ing

s

Earnings S&P 500 Price


Corporate Profitability and Valuation

Adjusted Earnings

Adjusted Assets

Adjusted Enterprise Values


Performance and Valuation Prime™ Analysis4847 U.S. companies (non-financial) Data Date - 06/13/2014

8.1% 7.8% 7.7% 8.3%

4.9%

1.5%

4.9%5.8% 5.8% 5.4%

3.2%4.5%

0%

5%

10%

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014E Mkt Imp

Asset'Growth

8% 8% 9% 9% 8%

6%

8% 9% 9%10%

11% 11%

0%

5%

10%

15%

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014E Mkt Imp

ROA'

1.9 1.9 2.0 1.9

1.4 1.51.7 1.6 1.7

2.0 2.1

0.0

0.5

1.0

1.5

2.0

2.5

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014E

V/A'

22.8 21.0 21.1 22.7 22.0

18.2 18.817.2 16.8 17.9 18.0

0

10

20

30

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014E

V/E'

Performance and Valuation Prime™ Analysis4847 U.S. companies (non-financial) Data Date - 06/13/2014

8.1% 7.8% 7.7% 8.3%

4.9%

1.5%

4.9%5.8% 5.8% 5.4%

3.2%4.5%

0%

5%

10%

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014E Mkt Imp

Asset'Growth

8% 8% 9% 9% 8%

6%

8% 9% 9%10%

11% 11%

0%

5%

10%

15%

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014E Mkt Imp

ROA'

1.9 1.9 2.0 1.9

1.4 1.51.7 1.6 1.7

2.0 2.1

0.0

0.5

1.0

1.5

2.0

2.5

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014E

V/A'

22.8 21.0 21.1 22.7 22.0

18.2 18.817.2 16.8 17.9 18.0

0

10

20

30

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014E

V/E'


Macro Environment: U.S. Inflation and the P/E Ratio

Inflation

Dividend and

Capital Gains Tax

YearsAverage

P/E

>4%Low Tax 5 13.5x

High Tax 26 11.2x

0%-4%Low Tax 22 20.1x

High Tax 32 16.3x

<0%Low Tax 9 22.3x

High Tax 5 12.4x

Source: Capital IQ, Valens Credit, February 1, 2014Do Not Distribute Without Consent From Author

0

10

20

30

40

50

60

70

80

90

100

1.4

1.5

1.6

1.7

1.8

1.9

2.0

2.1

2.2

2.3

Jan

-59

Au

g-6

0

Mar

-62

Oct

-63

May

-65

Dec

-66

Jul-

68

Feb

-70

Sep

-71

Ap

r-7

3

No

v-7

4

Jun

-76

Jan

-78

Au

g-7

9

Mar

-81

Oct

-82

May

-84

Dec

-85

Jul-

87

Feb

-89

Sep

-90

Ap

r-9

2

No

v-9

3

Jun

-95

Jan

-97

Au

g-9

8

Mar

-00

Oct

-01

May

-03

Dec

-04

Jul-

06

Feb

-08

Sep

-09

Ap

r-1

1

No

v-1

2

M2 Money Velocity and Recessions – 64 years up to December 2013



Market Bubble

Capitulation

Bear Rally

First Stage Bull

Second StageBull

Double Top










Reliable, Timely Corporate Credit Ratings- Widespread availability, Bloomberg, Google Finance, SA, etc.

Fully Detailed, Transparent Company Ratings Reports- As a single pdf report, or fully accessible (pdf, xls) for full subscriptions

Valens Credit Weekly Insights- Timely long/short credit and equity trading ideas from major dislocations

Valens Market Phase Cycle Report- Equity and Corporate Credit Macroeconomic “Aggregate” Analysis

Custom Security, Tranche, Basket, Portfolio Analysis- On request: CDS baskets, private companies w/ public debt, trade scenarios

Education & Training; Strategist Meetings- On-site analyst & PM training, Keynote speeches, Strategist calls/meetings


Disclosure

VALENS CREDIT | PRIVATE AND CONFIDENTIAL PAGE 51

This material has been prepared by Valens Credit & Valens Securities (“Valens") and is provided for informational purposes only. This presentation is solely for informational purposes to

assist prospective investors in determining whether they have a preliminary interest. This presentation is a summary and does not purport to be complete.

This presentation does not constitute an offer to sell, or a solicitation of any offer to buy or sell, any securities. Any such offer will be made solely to qualified investors by means of a

final Confidential Private Placement Memorandum (as amended, the “Memorandum”) and related subscription materials, with respect to an investment in Valens which will contain

material information not contained herein and to which the prospective investors are directed. This presentation is not intended to replace the Memorandum. Before investing, you

should carefully read the Memorandum.

The information provided is not intended to provide a sufficient basis on which to make an investment decision. Information and opinions presented in this material have been obtained

or derived from sources believed by Valens to be reliable, but Valens makes no representation as to their accuracy or completeness. Valens accepts no liability for any loss arising from

the use of this material.

Any reference to potential asset allocation, potential returns or investing do not represent and should not be interpreted as projections. Performance data shown represents past

performance and is no guarantee of future results. Current performance may be higher or lower than performance quoted herein. Performance for periods less than one year are

cumulative, not annualized. Total returns include changes in share price and reinvestment of dividends and capital gains, if any.

This presentation is confidential and proprietary. Accordingly, this presentation is to be treated as strictly confidential and not disclosed, directly or indirectly, to any party other than the

person to whom it has been delivered and such person’s professional advisors. Any distribution of this presentation, in whole or in part, or the divulgence of any of its contents, is

unauthorized.


do not distribute without consent from author · - jesse livermore $100mm: equities 1 year focused...

Documents