Investing in Volatile Times

Colorado Financial Management

Thursday, May 28, 2009(Gary’s Milestone Wedding Anniversary)

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Market Outlook

Are stock markets experiencing a near-term rally in a long-term slow to no-growth environment?

Long-term market challenges Consumer, corporate and government debt Period of deleveraging and reregulating US consumer spending will contract from 70% of GDP

to 60%-65% of GDP Entitlement programs and excessive government

debt will limit government’s ability to provide additional stimulus

Long-term GDP growth may average 2.5%, not 3.5%

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Market Outlook

Why has the stock market increased so much from the March 9th low? March 9 low may have been an over-correction The economy has most likely bottomed Consensus GDP forecast indicate very modest growth

(not contraction) in second half of 2009 Earnings although far below 2006 and 2007 highs

have most likely bottomed Interest rates are probably at their low point,

meaning eventually more return potential in stocks vs. bonds.

Stock markets anticipate the events above

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CFM Economic ChartsEarnings

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Market Outlook

How long will this stock market rally last? No one knows for sure - perhaps 9 to 12 months with

intermittent corrections Stimulus benefits may abate in 2010 Inflation concerns and higher interest rates are possible

in 2010 Energy prices will increase with improved global

economies US consumer will remain challenged by debt Potential for tax increase – corporate and individual It may likely take 5 - 7years for corporate earnings to

reach their pre-recession highs

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Secular Bear Markets

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Evolution of CFM

From individual bonds to PIMCO bond mutual funds

From primarily buy and hold investment strategy, to fundamental and then to tactical asset allocation strategy

Goal to make timelier changes in asset allocation

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Some things don’t changeat CFM

Broad bond-stock asset allocation Incremental movements in allocation Minimum bonds and maximum stocks

based upon client profile and desires

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Some things don’t changeat CFM

Core investments have worked well – timely changes in asset allocation were the problem

Core investment characteristics Above average dividend payments High rankings in longer term risk-

adjusted performance

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CFM Fund PerformanceM1

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Relying more on tacticalasset allocation Fundamental analysis is the study of economic

factors that ultimately provide the underpinnings for the stock market Earnings Interest rates GDP growth, etc.

Tactical analysis is a study of the market itself – which is the leading economic indicator Momentum Resistance levels Relative bond-stock performance, etc.

We need both11

Relying more on tacticalasset allocation

Why Ned Davis tactical research (NDR)? Their philosophy is to remain broadly allocated with

bond minimums and stock maximums NDR moves incrementally CFM back tested NDR asset allocation

recommendations to 1981

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NDR Tactical AllocationExample of Data

Stock/Bond Trend Model (Triple Weighted) Stock/Bond Ratio Trend Stock/Bond Oversold Indicator % of Stocks Above 10W & 30W Moving Average Small-Cap/Large-Cap Ratio ROC Bond Momentum Fed Model Baa Bond Yield – S&P Earnings Yield Spread Real Economic Liquidity Real Monetary, Fiscal & Exchange Rate Weekly Unemployment Claims Money Supply & Demand S&P 500 Real Dividend Growth

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NDR Tactical AllocationExample of Data

II Bull/Bear Sentiment + Monetary Commitments of Traders (Sentiment) Unsmoothed Model Reading Final Model Reading (Five-Week

Moving Average) Big Mo NDR has over 2,000 charts but boil it

all down to ongoing bond-stock asset allocation recommendations based upon judgment

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NDR Bond – Stock Allocation

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NDR Tactical AllocationData 2007 - 2009

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NDR Tactical AllocationData 1981- 2009

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NDR Tactical Allocation CFM conclusions:

Had CFM applied NDR historical tactical allocation recommendations, we would have seen improved performance and reduced volatility

Historically NDR recommendations have been timely in up and down markets

CFM will increase weighting of NDR recommendations in our asset allocation Reality Check

Is InvesTech tactical allocation moving in the same direction?

Are fundamentals trending in the same direction?

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NDR Tactical Allocation How do we get there from here?

The stock markets have increased substantially since the March 9th low

There is a reasonable probability of a correction of 5% to 10% over the next couple of months

Maybe not Options

Client choice Maintain bond/cash minimums by portfolio Be patient, wait for correction and then rebalance Move incrementally to NDR allocation - four months? Do nothing and wait for NDR to lower their stock allocation Err towards conservative unless client directs otherwise

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Bond Mutual Fund Policy

Two current interest rate dynamics General upward pressure on interest

rates, particularly treasuries Interest rate on other bonds compared to

(spread) treasuries narrowing Non-treasury bonds preferred at this time High quality corporate bonds may have

appreciation potential (spread narrowing) Eventually rates will go up and bond

maturities will need to be shortened

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Bond Mutual Fund Policy

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Minimum Bonds, but Minimum Stocks Too

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Regional Asset Allocation

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Sector Weightings

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This too shall pass

It will take time but the sun will again shine

Human spirit has incredible capacity to adapt and improve

The emergence of India and China are significantly positive

Global free markets purge excess, correct mistakes and reward efficiency and hard work

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Thank you We know that this is a challenging and

unprecedented situation for all CFM’s lessons learned

The risks with individual bonds are not worth the benefit

We must become more timely with changes in asset allocation

Know that our intentions always have been and will always be in the best interest of our clients, our friends

Questions

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