Kevin M. Wilson, ChFC, PhD President/CEO/CIO Dheenu Sivalingam, MBA AVP/CCO/Senior Analyst 1405 Medical Arts Building 324 W. Superior Street Duluth, MN Office: Toll Free: Fax: Monthly Market Review “Ways to Win in 2013” January 17,

INTRODUCTION KEVIN M. WILSON 2 1.The public buys at the top & sells at the bottom 2.Excesses in one direction lead to an opposite excess later 3.Exponentially rising markets go further than you think… 4.…But they do not correct by going sideways 5.When all experts agree, something else will happen -Bob Farrell

ECONOMIC MACRO-TRENDS WORTH INVESTING IN KEVIN M. WILSON 3

4 Deflation/Deleveraging and Money Printing Dominate

5 We Are Still In A Secular Bear Market, But There Are Ways To Make Money Cheap Fed Actions Boost P/E

China’s Economy At A Critical Turning Point – Which Way Will It Go? 6

7 Is Gold In A Bubble? When Will It Top Out? $976 Billion

8 Food Prices Will Continue To Rise, But Oil/Gas Depend More On Global GDP

9 Timber/Lumber Prices May Continue Upwards If Housing Recovery Strengthens

10 Economic Slowdown Will Favor Bonds In Short Term ObamaCare Will Lead To Changes In Efficiency & Pricing

11 The Stock/Bond Correlation Is The Lowest Ever, Making It Great To Own Bonds When Stocks Fall (But Terrible When Stocks Rise)

12 Caveats On Certain Trends Beware Reversion ETFs Favored At High Correlations

CAPITAL PRESERVATION UNDER EXTREME CONDITIONS KEVIN M. WILSON 13

S&P 500 Expected Returns Are Very Low, But Uncertainty About Returns Is High 14

15 All Assets Seem Risky Now, Possibly Forcing Changes In Asset Allocation Approach (e.g., “Risk Parity”)

16 Risk Parity Means Allocating Risks Instead of Allocating Assets (Risk Is Set Equal In Each Asset Class)

17 Recently This Situation Has Improved, But Dividends Still Critical

THE BEST MARKETS TO BE IN 18 DHEENU V. SIVALINGAM

Europe: Valuations Look Cheap 19

Higher Income From Dividends Than From Government Bonds 20

European Companies Are Proving Particularly Successful In Acting As A Gateway To The World. (BMW, Nestle) 21

*) Surging imports have caused Japan to fall into a trade deficit; *) Japan will most likely try to devalue the Yen; short the yen. *) 2% inflation target and on top of that promises to spend 10.3 trillion of Yens on infrastructural and defense projects Japan’s The Wild Card 22

A BAKER’S DOZEN: FORECAST SUMMARY FOR 2013/Q & A 1. EUROPEAN RECESSION WILL DEEPEN, BUT RECOVERY LATE IN YEAR 2. US WILL EXPERIENCE MILD RECESSION, THEN MUDDLE-THROUGH 3. BEAR MARKET WILL CAUSE PRICES TO DROP BY 32%-39%, THEN RALLY 4. QE3/QE4 PURCHASES WILL ACCELERATE TILL RECESSION RISK FADES 5. EM DEBT, EUROPEAN & JAPANESE STOCKS WILL OUTPERFORM 6. DEFLATION AND DELEVERAGING WILL CONTINUE AS THEMES 7. JAPAN’S EXPERIMENT WITH THE YEN & INFLATION FAILS 8. GOLD WILL FALL IN SHORT-TERM, RISE TO NEW HIGH IN LONG-TERM 9. OIL WILL STABILIZE AT $75 - $100/BBL. (ASSUMING NO WAR) 10. OBAMACARE TO BE IMPLEMENTED LATE OR WITH HUGE PROBLEMS 11. SAFE ASSETS CHANGING – CAUTION NEEDED W/TREASURIES, CASH; BUT HIGH DIVIDEND STOCKS WILL REMAIN ATTRACTIVE 12. FOOD PRICES TO SOAR LATER IN YEAR DUE TO DROUGHT, ETC. 13. CHINA’S RECOVERY DELAYED OR TERMINATED Y FALLING TRADE 23 KEVIN M. WILSON

APPENDIX 24 KEVIN M. WILSON

25 Extreme Situation (Financial Repression) Means Allocations Will Need To Change If Fed Continues With Current Policies (Future Returns Nearing Zero For Most Assets) FV Problem: Should We Risk Losing Money on Stocks If They Fall, Or Risk Losing Money On Bonds If Yields Rise, Or Maybe Continue To Lose Money on Cash Due To Fed Policy? (-2.5% Cash Return Line) Discount Factor Changes (dx/dt) DFV30 ER Cheap Expensive

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