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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 55802 Office: 218-464-4399 Toll Free: 877-327-5062 Fax: 218-464-4397 Email: info@bluewater-cap.com www.bluewatercapitaladvisors.com Monthly Market Review “Come On In, The Water’s Fine!” February 21, 2013 11 Ted A. Pavlovich, WMS VP Wealth Management
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INTRODUCTION TED A. PAVLOVICH 2
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WALL STREET IS CONFUSED ABOUT RISK KEVIN M. WILSON 3
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Wall St. & the Fed Both Ignored the Risk of a Stock Bubble in 1995-2000… …And They Also Ignored The Housing Bubble In 2003-2007 4
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5 Banks Were Over-Leveraged VaR Underestimated Risk
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6 Market Still Uses Risk Measures That Failed in 2008 Fat Tails Still A Problem Bimodal Data Also Ignored By Many
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7 Modern Portfolio Theory Has Failed Investors MPT Actual Data
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8 Diversification Strategies For Stocks Alone in 2008-09 Failed, But Adding Bonds Worked Very Well
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9 Fed’s Response to Crisis = Massive Additions to Balance Sheet Central Banks Practicing Financial Repression
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10 Markets Have Responded to Easy Money Policy Dramatically Making a Molehill Out of a Mountain
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11 No One Likes Bonds, But Surprise! (They’re Still Doing Well)
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THE SHORTEST DISTANCE TO YOUR GOALS IS NOT A STRAIGHT LINE TED A. PAVLOVICH 12
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No Reason To Think This Pattern Is Over 13
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14 Timing Strategies Work Because Losses Are Much Smaller …And Bond Gains Offset Stock Losses
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15 Investor Euphoria Denotes Tops
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16 Feb. 2013 Valuations Suggest A Reversal Could Happen
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MARKET RALLY DRIVEN BY P/E EXPANSION 17 DHEENU V. SIVALINGAM
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Price/Earnings Ratio or PE The price/earnings ratio or PE is a unit cost, much like the cost of a pound of coffee or a gallon of gas, which allows one to assess a price by comparing it with a typical, historical unit cost. You can certainly tell if a pound of coffee or gallon of gas is higher or lower than normal in price. In this case, it’s the cost of one dollar’s worth of that company’s earnings. PE expansion is an increase in that unit cost. 18
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Assuming (Heroically) That All Things Stay The Same… 19
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Market Cycles Defined By Valuations 20
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Most investors do not see P/E expansion as the lion's share of the market's 1982-2000 gains; Instead, they credit a robust economy, technological advances, productivity gains, and (of course!) earnings improvement. And all those elements did have an obvious impact, but they were responsible for a small portion of the performance. The biggest contribution these four elements had was not to the bottom line; rather, it was to investor psyches that gradually became willing to spend more per dollar of earnings than they had before. These factors allowed investors to rationalize higher prices. Now = 15.1 21
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Bull markets are periods of P/E expansion. During Bulls, investors are willing to pay increasingly more for each dollar of earnings; Bear markets are periods of P/E contraction. Investors demand more earnings for each dollar of share price they are willing to pay. History shows that when the inflation is very low or very high, or interest rates decline, or when the deficit goes down, the P/E usually expands. 22
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GROUND HOG DAY IN THE MARKETS 23 KEVIN M. WILSON
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Ground Hog Day For Speculators Over-Confidence Typical of a Top 24
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25 Serial Fed-Induced Bubbles Look Similar
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26 Stock Buybacks Have Supported Markets Also
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27 Déjà Vu
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28 Treasuries Will Offset the Risk of Stocks
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SUMMARY/Q & A 29 KEVIN M. WILSON 1)Don’t Listen to Wall Street – They Always Tell You To Buy 2)Bond Performance Has Matched Stocks But Is Reciprocal in Nature 3)Timing Strategies Work By Managing Losses 4)P/E Expansion Has Driven the Rally Lately 5)Don’t Forget How the Last Fed-Induced Bubble Ended 6)When the Next Decline Ends, A Huge Opportunity Will Follow
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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 30
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