Kevin M. Wilson, ChFC, PhD President/CEO/CIO Dheenu Sivalingam, MBA AVP/CCO/Senior Analyst 1314 E. Superior Street Suite 2 Duluth, MN Office: Toll Free: Fax: Monthly Market Review “High Risk, Low Reward, And 2012 Investment Ideas That Fit The Times” January 19, 2012 Ted A. Pavlovich, WMS VP Wealth Management 1

INTRODUCTION TED A. PAVLOVICH 2

WHAT WE LEARNED IN 2011 KEVIN M. WILSON 3

4 Structural Debt Problems In Europe Have Not Been Resolved

The EU Nations Will Also Raise Taxes, Privatize Assets, Cut Spending, and/or Devalue The Currency 55

6 Loose Money Hasn’t Fixed Economy, But Has Helped Banks Recover; Only De-leveraging Will Work

7 Markets Are Macro-Driven Over Intermediate Term

8 Technical Analysis Helps With Surviving Volatility, But Must Be Used On A Large Scale

TWELVE PREDICTIONS FOR 2012 KEVIN M. WILSON 9

10 President Obama Will Lose Based On Current Data, Given Historical Tendencies Current DPI vs. Trend Current NFP vs. Trend Current GDP Forecast

Euro-zone Debt Crisis Is Hurting The Global Economy 11

EU Crisis Will Peak… …And A Big Bank Will Fail… …But Then ECB Will Print Money 12

The Federal Reserve Will Initiate “QE3” 13

14 Recession or Not, The Economy Will Be Sluggish For Years Banks

15 Deflation Will Continue… …Because De-Leveraging Will Take Many Years

Profit Margins Will Mean-Revert… …Helping Bear Market To Continue Downward 16

Flash crash of 05/2010 Demonstrated ETF Trading Risk; This Risk Continues 17

32 BBO/Yr. 13 BBO/Yr. After Market Correction, Supply & Demand Problems for Oil Will Continue in

China and India Will Again Put a Strain on Global Food Supplies Later in

MACRO-ECONOMIC CONSTRAINTS ON THE RISK/REWARD MATRIX IN 1H/2012 KEVIN M. WILSON 20

Poor Choices on Risk/Reward Analyses Have Consequences

Graphing The Risk/Reward Matrix Greek Assets Italian Assets Chinese Assets German Assets 22

Macro: Real DPI (blue) Falling Rapidly, Raising Risk to Economy & Markets, As Real Final Sales (red) Will Follow 23

Macro: Trend Is Improving, But Level Of Retail Sales Is Still Very Low 24

Macro: PCI Index Flat-to-Down, Level Is Low 25

Macro: Consumer Confidence Improving, But Level Very Low 26

Macro: Divergence Between S & P 500 & Treasuries Indicates Pivot Point 27

Macro: Italian M3 Money Supply Looks Very Dangerous, And Perhaps Is Partly Off-Set By Black Market Activity; However, Similar Examples Include Russia, Greece 28

Allocation Levels Informed By Macro Constraints On The Risk/Reward Matrix (Currently Favors Bonds) 29

Long Bear Market Episodes (Bond Rallies) Are Followed By Huge Stock Rallies ? 30

Individual Stocks: Risk/Reward Diagram Useful Kodak Stock 31

SOME WINNING IDEAS FROM 2011 THAT SHOULD WORK AGAIN IN TED A. PAVLOVICH

33 Buy Dividend Payers?!

Buy Zeros?! Buy US $?! Composition of DXY Gold?? 34

Secular Themes: Long Term Consumption Trends 35

As incomes rise above subsistence levels, high-value food products become more prevalent in diets. Such products include meat and processed foods like fats, oils, and confectionery products. As shown in the above graph for China, India, and Brazil, protein consumption has the largest projected growth potential. 36 Changes In Protein Consumption Will Continue

Water Purification Will Be A Big Problem, Due To Demand For Oil, Gas, and Food 37

EUROPEAN AND OTHER CRISES WILL PROVIDE BIG INVESTMENT OPPORTUNITIES 38 DHEENU V. SIVALINGAM

EUR Weakness is Good for European Companies  European equity outperforms 88% of the time when Euro weakens.  Organization for Economic Co-operation and Development estimates that, for every 20% drop in the Euro, the Eurozone will enjoy a 1.6% boost to real economic growth. And corporate earnings will rise 22%.  If these benefits outweigh proposed austerity measures to cut spending and raise taxes, we could see quick European equity outperformance; most likely it will be good for some countries and not so good for others. 39

 European equities that generate more than half of their revenue from outside Europe will benefit the most. 40

Being a Contrarian  The road ahead won't be easy. Investors must focus on the Eurozone countries that stand to benefit the most from the Euro's slide.  Like any contrarian countertrend idea, calling the exact bottom of this downturn is impossible. Moreover, it's likely that a few years down the road, the PIIGS will end up restructuring their debt anyway, much like Dubai recently did.  Europe is headed for change, in that either it will emerge from the crisis with greater fiscal unity, or with a different membership. Either way, the Eurozone will be different to the one that exists today, something investors need to understand. 41

SCREENING FOR WINNING STOCKS IN A FLAT MARKET 42 DHEENU V. SIVALINGAM

Investing in Flat Market  Be good stock pickers rather than closet index trackers. 43

 Look for companies with low expectations. Investors can sometimes become overly pessimistic about the prospects for a company for many reasons. But a strong business that has maybe just hit a temporary snag can generate extraordinary returns, if it is able to right the ship.  Look for companies who have a strong innovating culture, There have been many technological advances since 1998, but not all of them have led to profitable growth for firms. The companies that have succeeded at innovating are the ones that have banked real profits and produced positive cash flow for their owners.  Look for companies who are in a favorable industry trends. A rising tide lifts all boats. In other words, some companies have seen strong gains simply because of the industries they operate in. These companies have the wind at their backs and don't have to fight tooth-and-nail to steal market share in order to grow. The pie simply grows larger and everyone wins. 44

 Look for companies who have a strong dividend and dividend growth. Although dividends have historically accounted for close to 40% of the total return of the stock market, they were not very fashionable in the late 1990's. But in this era of super low interest rates and choppy stock markets, the dividend stock seems to be making a bit of a comeback. Not only can you get a higher yield right now on many blue chip stocks than you could on a 10-year Treasury note, many of these companies consistently raise their dividends each year. There are strong tax advantages as well, assuming tax laws don’t change.  Look for companies who have attractive valuations. Fortunately for long- term investors, valuations on the S&P 500 are much more attractive than they were in But that doesn't guarantee strong returns for the stock market over the next decade.  Be disciplined. Don't buy it unless the price is at the level you believe is at or below the true value of the company. In long periods of a flat or sideways market, you want the holding of the stock to be worth your while. 45

SUMMARY & CONCLUSIONS 46 KEVIN M. WILSON -Risk/Reward Dangerous, But Market Wants To Go Up Near Term -Economic Data and Earnings Should Cause Doubt Going Forward -We are Ready For Either Case, But Currently Positioned Against Risk -If Market Sells Off, Risk/Reward Will Be VG & Huge Opportunity Awaits

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