Kevin M. Wilson, ChFC, PhD President/CEO/CIO 1405 Medical Arts Building 324 W. Superior Street Duluth, MN Office: Toll Free: Fax: Monthly Market Review “What Happens When The Fed Changes Its Policy?” (An Evaluation of Risk and Reward) June 20, Ted A. Pavlovich, WMS VP Wealth Management Dheenu Sivalingam, MBA AVP/CCO/Senior Analyst

INTRODUCTION TED A. PAVLOVICH 2

THE FED HAS DRIVEN HISTORICAL ASSET BUBBLES AND THEIR COLLAPSES TED A. PAVLOVICH 3

Bubbles All Look Like The Eiffel Tower 4

5 Negative Real Rates (Imposed by Fed) Caused Bubbles

6 Sequential Bubble-Blowing Punishes Investors

7 Fed’s QE “Bubble” (Stocks/Bonds) May Be Deflating Now

TWO POSSIBLE SCENARIOS FOR GLOBAL STOCKS DHEENU V. SIVALINGAM 8

Two Possible Scenarios For Global Stocks  MSCI Emerging Markets Index has tumbled 9.3 percent in 2013 after delivering 11 percent annualized returns over the past 10 years.  BRIC nations-Brazil, Russia, India and China-has sagged 11.7 percent following a 10-year track record of 13 percent gains. 9

Bear Market Indicator Flashing Red in U.S. 10

11 Currency War May Change Many Things

12 Muddle-Through (Japanese) Scenario Is Also Possible

13 Who Will Be The Winners?

NAVIGATING THE END-PHASES OF ASSET BUBBLES 14 KEVIN M. WILSON

15 Bubbles Have Been Caused By Fed Setting Effective Rates Too Low For Too Long

16 QE’s Effectiveness Was Waning Anyway

17 Strategic Normalization of Interest Rates Will Happen

18 Notice That Stocks Can Rally As Yields Rise

SOLVING THE PRUDENT INVESTOR’S DILEMMA 19 KEVIN M. WILSON Real Interest Rates-10 Yr.

Interest Rates Have Been Very Low, Hurting Retired/Conservative Investors 20

But If Rates Start To Normalize, Bonds Will Sell Off Likely Rate? 21

22 Solution: Move To Higher Stock Allocations

SUMMARY 23 KEVIN M. WILSON 1)Fed has blown up, and then popped, a whole series of bubbles 2)Global equities could rally once the adjustment to new rates has occurred, or we could enter a “muddle-through” period 3)Previous episodes of interest rate normalization has sometimes been associated with strong stock rallies 4)Prudent investors will soon see yields rise substantially, but must weather the drop in bond prices that goes with that 5) The best solution is to significantly increase stock allocations over the long term

Q & A 24 KEVIN M. WILSON TED A. PAVLOVICH DHEENU V. SIVALINGAM

This report is provided for informational purposes only and does not constitute an offer or solicitation to purchase or sell any security or commodity and is not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. Any opinions expressed herein are subject to change at any time without notice. Information has been obtained from sources believed to be reliable, for its accuracy and interpretation are not guaranteed. Investing in securities involves risk, including possible loss of principal. Past performance should not be taken as an indication of guarantee of future performance and no representation, express or implied, is made regarding future performance. The firm does not provide tax advice; clients should contact their attorney, accountant, or other tax adviser regarding tax matters. “BWCA is a state registered investment adviser in all states in which it is required to be registered. All Blue Water Capital Advisors’ customer assets are held in the customer name with Fidelity Institutional Services, clearing through National Financial Services (NFS), Member SIPC, a Fidelity Investments Company as Qualified Custodian.” Disclaimer 25