May 2012 History Often Rhymes - Mark Twain THE ECONOMIC SYMPOSIUM

“THE FUNCTION OF ECONOMIC FORECASTING IS TO MAKE ASTROLOGY LOOK RESPECTABLE” -John Kenneth Galbraith

What Do Market Bottoms Look Like? September 1974 DJIA down 46% President Nixon forced to resign United States forced to withdraw from Viet Nam Arab Oil Embargo in full swing creating the worst recession since the great depression Largest failure in retailing history – W.T. Grant New York City on verge of bankruptcy August 1982 Double digit inflation 20% interest rates 600 banks in trouble over bad loans Washington Public Power System defaulted on $2.5 bil in bonds – largest in history Horrendous recession with over 10% unemployment Popular Market Guru predicting 30 years of depression and despair September 1990 Dennis Levine and Ivan Boesky insider trading scandals had shaken confidence Michael Milken on trial for stock manipulation and powerful Drexel Burnham bankrupt Saddam invades Kuwait and pundits predicting $100/bbl oil Charles Keating – American S&L CEO jailed for fraud relating to high yield bonds USSR Breaking UP – International instability October 2002 Worst bear market since with NASDAQ down 78% Enron, WorldCom, Dot Com Iraq Again Two of the most respected investors on Wall Street calling for another 30% drop

PANIC The worst week ever in history for the Dow Jones Industrials

Raw Fear

Stomach Churning Volatility Volatility experienced in 2008 was mind-boggling S&P 500 Index had 28 trading days during 2008 with a percentage change of at least 4% (gain or loss) That matched total of 28 occurrences generated in the previous 25 years from 1983 to 2007, according to BTN Research For 2008, DJIA registered 6 of its 10 worst point days, including points on September 29 th At the same time the DJIA notched 7 of its 10 best point days, including points on October 13 th

A Significant, Perhaps Historic, Low in March

Stocks are up 100%+ off the March lows, but mutual fund flows look like we are in the doldrums of the 2002 bear market. Investors are heavily favoring bonds over stocks despite the fact that the Earnings Yield on Stocks is 7.8% while the 10-Year Treasury Yield is 1.92%. What happened to the old adage that money goes where it is treated the best?

Stocks are extremely undervalued versus bonds and have been so for a protracted period. To be “fairly valued”, the S&P 500 would need to be over That’s a 325% gain from current levels! The Fed Model

THE VALUE OF PATIENCE Five Year Holding Periods Are Up 90% Of The Time

S&P 500 Rolling Returns Stocks have a historical tendency to produce attractive returns following prolonged periods of poor returns.

10 Yr. Moving Average of Returns on Large Capitalization Stocks 1827-Present Data compiled by Ibbotson Associates

The message here is that there have been only four other times in history going back to 1836, when the Total Return on Large Capitalization stocks has averaged 2.5% or less over a ten year period. You’ll notice that over the ensuing ten year periods, returns ramped up sharply in each case. To me, this chart is one of the best arguments for using periods like this to establish long-term investments. In the four previous instances where this took place, the average over the next ten years was a 14.6% Total Return per year. The Range was 12.9% to 15.7%. Putting that math to work, yields a target on the Dow Jones Industrial Average approaching the same level we got by applying the Fed Model and computing Fair Value versus Bonds - Over 20,000 on the Dow. The Possible Implications

Let’s assume that history repeats itself. Where could the Dow Jones Industrial Average be by the end of 2018? Low End of the Range29, Median34, High End of the Range37, The Possible Implications

THE WILD CARD