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Investment Outlook 2010 03 For Public

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Lighthouse Investment Management Investment Outlook - March 2010

Lighthouse Investment Management Investment Outlook - March 2010

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  • 1. Investment Outlook
    March 2010
    © 2010 Lighthouse Investment Management
  • 2. August 12, 2008
    • Dear investors, dear friends:
    • 3. Managing money tax-efficiently is getting more and more difficult  and time-intensive. With a full-time job and a family I no longer  feel able to dedicate enough time to take care of your money.
    • 4. Furthermore I believe that, despite recent losses, most of the  "pain" in equities markets is still to come, as banks are under  tremendous pressure to reduce their balance sheets and credit is no  longer available for a lot of companies and individuals. This must lead to a significant reduction in company earnings that will top  the recessions of the years 2001/2 and 1991/2 by far.
    • 5. The US equity market reached its peak in October 2007 - the bear  market is not even a year old, and could last for a couple of years.  A stabilization of house prices in the US is not expected before 2010 or 2011.
    • 6. I therefore decided to liquidate HPF-funds after almost 23 years and return your money. I will begin selling our assets tomorrow and work out ways of returning cash with each investor individually.
    • 7. Thank you very much for your long-lasting trust. I hope I will be able to manage money professionally at a later stage, as over the  long term we have outperformed our benchmarks systematically and substantially.
    • 8. With best regards,
    2
    (c) Lighthouse Investment Management
    3/24/2010
  • 9. August 15, 2008 – March 12
    3
    (c) Lighthouse Investment Management
    3/24/2010
  • 10. Just 3 bits of information
    4
    (c) Lighthouse Investment Management
    3/24/2010
    Consumer = 2/3of GDP
    Impact of MEW on GDP
    Future of residential home prices (Whitney Tilson)
    Ignore everything else (e.g. Bernanke, Paulson)
  • 11. “Person of the Year” 2009:
    5
    (c) Lighthouse Investment Management
    3/24/2010
  • 12. Statements by Paulson/Bernanke
    • July 12th, 2007 – Paulson: "This is far and away the strongest global economy I've seen in my business lifetime.”
    • 13. August 1st, 2007 – Paulson: "I see the underlying economy as being very healthy,“
    • 14. October 15th, 2007 – Bernanke: "It is not the responsibility of the Federal Reserve - nor would it be appropriate - to protect lenders and investors from the consequences of their financial decisions.“
    • 15. February 14th, 2008 – Paulson: (the economy) "is fundamentally strong, diverse and resilient.“
    • 16. February 28th, 2008 – Paulson: "I'm seeing a series of ideas suggested involving major government intervention in the housing market, and these things are usually presented or sold as a way of helping homeowners stay in their homes. Then when you look at them more carefully what they really amount to is a bailout for financial institutions or Wall Street.“
    • 17. February 29th, 2008 – Bernanke: "I expect there will be some failures. I don't anticipate any serious problems of that sort among the large internationally active banks that make up a very substantial part of our banking system.“
    • 18. March 16th, 2008 – Paulson: "We've got strong financial institutions . . . Our markets are the envy of the world. They're resilient, they're...innovative, they're flexible. I think we move very quickly to address situations in this country, and, as I said, our financial institutions are strong."
    6
    (c) Lighthouse Investment Management
    3/24/2010
  • 19. Statements by Paulson/Bernanke
    • Mar 18th, 2008 - Bear Stearns Bailout Announced
    • 20. May 7, 2008 – Paulson: 'The worst is likely to be behind us,”
    • 21. May 16th, 2008 – Paulson: "In my judgment, we are closer to the end of the market turmoil than the beginning," he said.
    • 22. June 9th, 2008 – Bernanke: Despite a recent spike in the nation's unemployment rate, the danger that the economy has fallen into a "substantial downturn" appears to have waned.
    • 23. July 16th, 2008 – Bernanke: (Freddie and Fannie) “…will make it through the storm”, "… in no danger of failing.","…adequately capitalized“
    • 24. July 20th, 2008 – Paulson: “It's a safe banking system, a sound banking system. Our regulators are on top of it. This is a very manageable situation." 
    • 25. August 10th, 2008 – Paulson: ``We have no plans to insert money into either of those two institutions.” (Fannie Mae and Freddie Mac) 
    • 26. Sept 8th, 2008 - Fannie and Freddie nationalized. The taxpayer is on the hook for an estimated 1 - 1.5 trillion dollars. Over 5 trillion is added to the nation’s balance sheet.
    • 27. September 16th, 2008 - $85 Billion AIG Bailout “Loan”
    • 28. September 19th, 2008 - $700 Billion Bailout Plan Announced
    7
    (c) Lighthouse Investment Management
    3/24/2010
  • 29. 8
    The Economy
    (c) Lighthouse Investment Management
    3/24/2010
  • 30. US Economy: 4 things to know
    9
    (c) Lighthouse Investment Management
    3/24/2010
    • This is not a typical recovery
    • 31. Consumers will not be able to drive GDP growth1. House no longer the ATM (refi / second mortgage)2. De-leveraging and higher savings3. Higher taxes4. 8m jobs lost
    • 32. Fiscal stimulus to wear off in 2010-11
    • 33. Inventory cycle
  • GDP = Consumption = Employment
    10
    (c) Lighthouse Investment Management
    3/24/2010
  • 34. 2016: Recovery from Lost Jobs
    11
    (c) Lighthouse Investment Management
    3/24/2010
  • 35. Federal Withholding Taxes %yoy
    12
    (c) Lighthouse Investment Management
    3/24/2010
  • 36. US vs. Japanese Housing Bubble
    13
    (c) Lighthouse Investment Management
    3/24/2010
  • 37. US: Debt by Sector
    14
    (c) Lighthouse Investment Management
    3/24/2010
  • 38. US: Path to losing AAA
    15
    (c) Lighthouse Investment Management
    3/24/2010
  • 39. Fed Financed 91% of 2009 Deficit
    16
    (c) Lighthouse Investment Management
    3/24/2010
  • 40. Fed Balance Sheet: Maturities
    17
    (c) Lighthouse Investment Management
    3/24/2010
  • 41. US economy: GDP calculation
    18
    Production = Sales + Inventory changes
    (c) Lighthouse Investment Management
    3/24/2010
  • 42. US Economy: Inventory Cycle
    19
    (c) Lighthouse Investment Management
    3/24/2010
  • 43. GDP: Production vs. Sales
    20
    (c) Lighthouse Investment Management
    3/24/2010
  • 44. Inventory effect in Q4 2009: 3.9%
    21
    (c) Lighthouse Investment Management
    3/24/2010
  • 45. Fiscal stimulus: 1.9% of GDP
    22
    (c) Lighthouse Investment Management
    3/24/2010
  • 46. US economy: Capacity Utilization
    23
    (c) Lighthouse Investment Management
    3/24/2010
  • 47. 24
    The Consumer
    (c) Lighthouse Investment Management
    3/24/2010
  • 48. Mortgage Equity Withdrawal (MEW)
    25
    (c) Lighthouse Investment Management
    3/24/2010
  • 49. Homeowner Equity
    26
    (c) Lighthouse Investment Management
    3/24/2010
  • 50. US Consumer and Trade Balance
    27
    (c) Lighthouse Investment Management
    3/24/2010
  • 51. US Consumer: Taxes, Savings
    28
    (c) Lighthouse Investment Management
    3/24/2010
  • 52. US Consumer: Confidence
    29
    (c) Lighthouse Investment Management
    3/24/2010
  • 53. US Fiscal Revenues vs. Expenses
    30
    (c) Lighthouse Investment Management
    3/24/2010
  • 54. Japan: 20 Years After Bubble Burst
    31
    (c) Lighthouse Investment Management
    3/24/2010
  • 55. US Inflation: Velocity collapses
    32
    (c) Lighthouse Investment Management
    3/24/2010
  • 56. Securitization of Debt: collapsed
    33
    (c) Lighthouse Investment Management
    3/24/2010
  • 57. US Inflation: TIPS Break-even Rates
    34
    (c) Lighthouse Investment Management
    3/24/2010
  • 58. GDP Growth Drives Bond Yields
    35
    (c) Lighthouse Investment Management
    3/24/2010
  • 59. US banks: Mark-to-mystery
    36
    (c) Lighthouse Investment Management
    3/24/2010
  • 60. US banks: FDIC is Out of Money
    37
    (c) Lighthouse Investment Management
    3/24/2010
  • 61. US Trade Balance: Goods
    38
    (c) Lighthouse Investment Management
    3/24/2010
  • 62. US Trade Balance: Services
    39
    (c) Lighthouse Investment Management
    3/24/2010
  • 63. US Trade Balance: Total
    40
    (c) Lighthouse Investment Management
    3/24/2010
  • 64. US Trade Deficit excl. Oil
    41
    (c) Lighthouse Investment Management
    3/24/2010
  • 65. International Indebtedness
    42
    (c) Lighthouse Investment Management
    3/24/2010
  • 66. Europe: Imbalances
    43
    (c) Lighthouse Investment Management
    3/24/2010
  • 67. Europe: Debt Burden
    44
    (c) Lighthouse Investment Management
    3/24/2010
  • 68. Europe: Greece = Time Bomb
    45
    (c) Lighthouse Investment Management
    3/24/2010
  • 69. Europe: Debt Solves Deficits?
    46
    (c) Lighthouse Investment Management
    3/24/2010
  • 70. China: Hangover to Come
    47
    (c) Lighthouse Investment Management
    3/24/2010
  • 71. China: Unsustainable Growth
    48
    (c) Lighthouse Investment Management
    3/24/2010
  • 72. China: Exports
    49
    (c) Lighthouse Investment Management
    3/24/2010
  • 73. 50
    (c) Lighthouse Investment Management
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    The Stock Market
  • 74. US Stock Market Cycles
    51
    (c) Lighthouse Investment Management
    3/24/2010
  • 75. Bear markets
    52
    (c) Lighthouse Investment Management
    3/24/2010
  • 76. US Stock Market: Valuation
    53
    (c) Lighthouse Investment Management
    3/24/2010
  • 77. Stock Market Valuation: Rob Shiller
    54
    (c) Lighthouse Investment Management
    3/24/2010
  • 78. US Stock Market: The 1970’s
    55
    (c) Lighthouse Investment Management
    3/24/2010
  • 79. US Stock Market: The 1990’s
    56
    (c) Lighthouse Investment Management
    3/24/2010
  • 80. US Stock Market: The 2000’s
    57
    (c) Lighthouse Investment Management
    3/24/2010
  • 81. Valuation matters
    58
    (c) Lighthouse Investment Management
    3/24/2010
  • 82. Why Not a New Bull Market?
    59
    Source: David Rosenfeld, Gluskin Sheff
    (c) Lighthouse Investment Management
    3/24/2010
  • 83. Commodities: Oil
    60
    (c) Lighthouse Investment Management
    3/24/2010
  • 84. Commodities: Gold
    61
    (c) Lighthouse Investment Management
    3/24/2010
    • All gold ever mined (163k t) would fill only 1/3 of Washington Monument (17% available for investing)
    • 85. Storage (bankrupt bank, at home, securitized, abroad)
    • 86. Denominations?
    • 87. Fair price?
    • 88. 2009: 594t demand from ETF’s (170t bars, 234t coins)
    • 89. GLD is second largest ETF in the US ($38bn)
    • 90. April 5, 1933, Roosevelt: Forbidding the Hoarding of Gold Coin, Gold Bullion and Gold Certificates
  • Exchange Traded Funds (ETF)
    62
    (c) Lighthouse Investment Management
    3/24/2010
  • 91. Gold demand by ETF
    63
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    3/24/2010
  • 92. 64
    The Investor
    (c) Lighthouse Investment Management
    3/24/2010
  • 93. What has changed, really?
    65
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  • 94. Summary
    • Stocks: expensive – 7 more lean years
    • 95. Bonds: expensive – some value in investment grade
    • 96. Commodities: expensive
    • 97. Money market / bank CD’s: low yield
    • 98. Muni’s: low yields, risk of bankruptcies, tax change
    • 99. Real estate: Market distorted by REO / banks
    • 100. Currencies: in race towards bottom, USD smallest evil Solution: “hibernate”, not lose money
    • 101. LQD, options strategies
    66
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  • 102. Big Questions:
    67
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    • Inflation or deflation?
    • 103. Emerging or Developed Markets?
    • 104. China: Driver or drag? Banking crisis?
    • 105. Oil shackle: Nuclear, solar and wind?
    • 106. Taxes: Only way is up?
    • 107. Political stability: social unrest?
    • 108. Sovereign defaults: Argentina, Venezuela, Eastern Europe?
  • Core Investment: LQD (ETF)
    68
    (c) Lighthouse Investment Management
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    • Passively managed fund with very low fees (0.15%)
    • 109. Replicates US investment grade corporate bond index
    • 110. Highly liquid (>1m traded daily)
    • 111. Income taxed as dividends; never paid out cap. gains
    • 112. Current yield 5.3% (3/11/2010)
    • 113. Largest position <1.2% of fund
    • 114. Very low transaction cost (free at Fidelity)
  • Corporate bonds: yields < Treasury
    69
    (c) Lighthouse Investment Management
    3/24/2010
    *) Comparable Treasury bonds
  • 115. LQD: Profile
    70
    (c) Lighthouse Investment Management
    3/24/2010
  • 116. LQD: Top 10 Holdings
    71
    (c) Lighthouse Investment Management
    3/24/2010
  • 117. LQD: Premium to NAV
    72
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    3/24/2010
  • 118. Other ETF’s and Rates
    73
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    3/24/2010
  • 119. Option Strategies
    74
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    3/24/2010
    • Earn money in declining or sideways markets
    • 120. Harvest “time value” of options
    • 121. 80% of options expire worthless
    • 122. Define and limit maximum risk in advance
  • Option Strategy: Short Puts LQD
    75
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    3/24/2010
  • 123. Option Strategy: Bear Call Spread
    76
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    3/24/2010
  • 124. Option Strategy: Iron Butterfly
    77
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    3/24/2010
  • 125. Option Strategy: Iron Butterfly
    78
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    3/24/2010
  • 126. Option Strategy: Flock of Butterflies
    79
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    3/24/2010
  • 127. A Perfect Match
    80
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    3/24/2010
    &
  • 128. Why Fidelity?
    81
    (c) Lighthouse Investment Management
    3/24/2010
    • Cost-efficient, user-friendly, online / mobile access
    • 129. Tax return software automatically downloads data
    • 130. Pooling of accounts for efficient money management
    • 131. Assets covered up to $500,000 by SIPC (t/o $100k cash)
    • 132. Additional protection up to $1bn via Lloyds of London
  • Why Fidelity?
    82
    (c) Lighthouse Investment Management
    3/24/2010
    • Products: 401k, IRA’s, 529’s, Mutual Funds (1,400 commission-free), Annuities, Life Insurance
    • 133. $8 online US stock trades
    • 134. 25 commission-free ETF’s
    • 135. Commission-free US Treasury Bills, Notes, Bonds, TIPS
    • 136. International investing (12 markets, 8 currencies)
    • 137. Minimum deposit: $2,500
  • Commission-free ETF’s
    83
    (c) Lighthouse Investment Management
    3/24/2010
  • 138. Customizable Charts and Data
    84
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  • 139. Lighthouse Investment Management
    85
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    • Money and assets remain in your account – at Fidelity
    • 140. Lighthouse obtains trading permission
    • 141. Lighthouse Services:1. Definition of appropriate investment strategy2. Execution and monitoring3. Risk control4. Reinvesting dividends / interest if desired5. Reporting (statements) by Fidelity6. Daily updates via Facebook, monthly Outlook
  • What to expect
    86
    (c) Lighthouse Investment Management
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    • Protect wealth
    • 142. Investment strategy tailored to individual risk preference
    • 143. Mid-single digit returns p.a.
    • 144. Absolute (positive) return
    • 145. Low volatility
  • What NOT to expect
    87
    (c) Lighthouse Investment Management
    3/24/2010
    • Tracking performance of stock indices like Dow Jones or S&P 500 (cheaper ways to do that, e.g. SPY)
    • 146. Relative return (no benchmarking)
    • 147. Individual stock picking (or advice)
    • 148. Tax optimization (taxes likely to change)
  • Lighthouse Investment Management
    88
    (c) Lighthouse Investment Management
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    *) by churning your assets
    **) High water marks
  • 149. Lighthouse Investment Management
    89
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    Thank you.