1. Kevin M. Wilson, PhD Chairman/CEO 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 Bi-Monthly Market Review “Investing Under Rising Interest Rates” (Finding the Right Balance of Risk and Reward) January 16, 2014 11 Ted A. Pavlovich, WMS President/Wealth Mgmt. Advisor

2. INTRODUCTION TED A. PAVLOVICH 2

3. 3 Short Term There Are Conflicting Signals

4. 4 Markets Could Correct, But May Not

5. NEW EMPLOYEES AND CONSULTANTS KEVIN M. WILSON 5

6. STOCK PICKING UNDER RISING RATES 6 KEVIN M. WILSON

7. First, Let’s Consider Recent Market History Yield Spreads S & P 500 7

8. 8 In Periods of Very High Rates, Equities Were Best (But With The Caveat That Volatility Was High)

9. 9 As Rates Rise, Inflation Could Take Off As Well; The Standard Market Result Would Be Falling P/E Ratios (Cheaper Valuations)

10. 10 As The Following Slides Show, However, Tactical Allocation Could Have Yielded Decent Returns, Even In The Volatile 1970s

11. 11 Asset Allocations Must Change To Include An Adjustment For Rising Rates

12. 12 Emerging Markets May Not Do Well… …But Certain US Sectors (Tech/Healthcare/Tele./Energy) Could Outperform Near Term

13. NAVIGATING IN A RISKY BOND MARKET 13 TED A. PAVLOVICH

14. Shorter Durations Are Required 14

15. Floating Rate Loans And High Yield Bonds May Do Well FRL’s HYB’s 15

16. As Long As High Yield Bonds Have Short Durations, Returns Should Be Acceptable 16

17. 17 Convertible Bonds Behave Oddly, But Could Do Quite Well Over Time

18. THE ROLE OF CASH AS RATES RISE 18 KEVIN M. WILSON

19. 19 Although Returns To Cash Are Likely To Be Poor, They At Least Are Not Volatile

20. 20 Once Rates Move To The High End, Only Market Timing And Radical Allocation Strategies Are Likely To Work -9% (+3% to -9%) -12% (+20% to -14%) -7% (+36% to -35%)

21. SUMMARY 21 KEVIN M. WILSON 1)Over the long term, stocks should strongly outperform other assets 2)Bonds should underperform, except for TIPS, FRL’s, and CB’s 3)Cash holdings will have negative returns but could play a bigger role 4)Real estate may be an important alternative asset class 5)The ability to pivot allocations at inflection points will be critical

22. Q & A 22 KEVIN M. WILSON TED A. PAVLOVICH

23. 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 23