George Feiger - Investing in a World of Volatility 2011
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  • 1. Investing InA World of Volatility November 2011 George Feiger CCA1111-0196-R
  • 2. Expect Several More Years of Extreme Volatility Everything is connected All the parts have long-lasting problemsBut Don’t Despair! The US is the least bad place to invest now The longer term is brighterYour Investments Need to Work With This Reality Follow a personal financial plan Explicitly invest for the near-term and the long-term 2
  • 3. Volatility Rises Because We Connected Everything Growth of 2011 emerging markets Collapse of socialism Spread of securitizationDeregulation of Options on interest rates Explosion of everything pension savings Deregulation 1980 of capital flows 3
  • 4. Every Investment Must Be EvaluatedIn Light of Global Issues US Euro Zone Issues Issues Your Investments!Resource EmergingSuppliers Markets Issues Issues 4
  • 5. So Let’s Do That US Euro Zone • Excessive debt Issues • Drowning in • Financial crisis Issues debt to come • Little real • Recession growth • Structural flaws • SpeculativeResource The tail on all bubbles Emerging these dogs! • InflationSuppliers • Unsustainable Markets Issues growth Issues structure 5
  • 6. The US Is Drowning in Debt Total Credit Market Debt as a % of GDP 380 380 345 345 305 305 265 265 225 225 185 185 145 145 1925 35 45 55 65 75 85 95 05Source: Ned Davis Research, 2011 6
  • 7. All of Us … Households Liabilities/Disposable Personal Income140 140120 120100 100 80 80 60 60 1955 60 65 70 75 80 85 90 95 00 05 10Source: Ned Davis Research, 2011 7
  • 8. Nonfinancial Companies Nonfinancial Corporate Debt as a % of GDP 48 48 42 42 36 36 30 30 24 24 1955 60 65 70 75 80 85 90 95 00 05 10Source: Ned Davis Research, 2011 8
  • 9. And Governments Government Debt (Federal, State, Local) + GSE Debt as a % of GDP Debt Measure159 ** 159 Gross Federal + GSE* Debt + State & Local Gross Federal + GSE Debt135 Gross Federal Debt Publicly Held Federal Debt 135105 105 82 82 64 64 50 50 39 39 30 30 24 24 1955 60 65 70 75 80 85 90 95 00 05 10Source: Ned Davis Research, 2011 9
  • 10. This Has Killed Residential Real Estate US Home Foreclosure Starts per Quarter Total Number of Homes for Sale Median new home (millions, annually) („000) costs 34% more5.5 5.5 than median 800 existing home5.0 5.0 Forecast4.5 …. 1983-2004 Average 4.5 6004.0 4.03.5 3.5 4003.0 3.0 2002.5 2.52.0 2.0 01.5 1.5 Mar Mar Mar Mar Mar Mar 83 87 91 95 99 03 07 11 2006 08 10 12 14 15 Source: Credit Suisse, 2011 Source: Thomson Datastream; Capital Economics, 2011 10
  • 11. And Also Commercial Real Estate Moody‟s/Real CPPI Index (National All Property) 60% LTV here 60% LTV here% Change in Value 120% LTV here 120% LTV here Dec Aug Mar Nov Jul Feb Sep 00 02 04 05 07 09 10 Source: Bloomberg, LP Source: Bloomberg LP 11
  • 12. And Banks Are Reluctant to Lend to “Poor Credits” NFIB Small Business Credit Conditions 0 0-5 -5-10 -10 Now as bad as the early 1990s-15 -15 86 90 94 98 02 06 10 11 Source: Ned Davis Research, 2011 12
  • 13. Today’s Euro Zone Is in its End-game “The era of procrastination, of half-measures, of soothing and baffling expedients, of delays, is coming to its close. In its place we are entering a period of consequences.” ~ Winston Churchill, House of Commons speech, Nov .12, 1936 13
  • 14. Europeans Binged and Borrowed on HousesMore than We DidSource: Bank of International Settlements; Haver Analytics; McKinsey Global Institute, 2011 14
  • 15. The Weaker Economies Are All Linked by DebtSource: Bank of International Settlements; Bill Marsh, New York Times, 2010 15
  • 16. The Debt Sits Primarily WithinThe Major European BanksSource: European Banking Authority, Credit Suisse, Ritholz, 2011 16
  • 17. This Debt Is Now Rapidly Falling in ValueSource: Italy‟s Ministry of Economy and Finance; Thomson Reuters; Ritholz, 2011 17
  • 18. And You Ain’t Seen Nothing Yet!Source: Thomson Reuters, Ritholz, 2011 18
  • 19. The Euro Zone Is on the Edge of the “DeathSpiral” 19
  • 20. Underlying the Immediate Financial Crisis Is an Unviable Structure Real Competitiveness Indicators (Based on Relative Unit Labor Costs) (Q199=100)140 140 Germany130 130 Greece Italy Greece joins120 Ireland the euro 120110 110100 100 90 90 80 80 Q1 1995 Q1 1999 Q1 2003 Q1 2007 Q1 2011 Source: ECB, 2011 20
  • 21. GDP Growth Rate Required to Keep Debt/GDPStable* % per annum 8.4 Neither is plausible! 2.4 Italy Germany *Assuming current government debt levels and interest ratesSource: Satyajit Das, Financial Times, Nov 28, 2011 21
  • 22. If This Is So Obvious, Why Don’t Germany/ECB/EU/IMF Act? Euro Zone Prisoner‟s Dilemma Governments Governments Overspend and Best Strategy Stick to Rules Overborrow Won‟t Be Chosen! ECB ProvidesUnlimited Funds 0 -1 0 +1ECB Does Little -1 -2 -1 -2Payoff toSolvent States Source: Kathy Sato, PhaseInvesting Technologies, Inc., 2011 Payoff to Weak Member States 22
  • 23. The Choice Is Between Bad and WorseBut the Voters Want Neither Portugal, Ireland, Greece can’t pay So bailout or massive bank recapitalization BUT Frugal north doesn’t want to bail out profligate south So euro bailout scheme has no teeth BUT Portugal, Ireland, Greece can’t pay So … 23
  • 24. Emerging Markets Will Lead World EconomicGrowth Change in Industrial Production 250% 250% 200% 200% 150% 150% 100% 100% 50% 50% 0% 0% -50% -50% 1991 1993 1995 1997 1999 2002 2004 2006 2008 2010 Emerging Economies Developed Economies Source: Netherlands Bureau for Economic Policy Analysis 24
  • 25. But Unpleasant Things Still Happen There Real estate and credit bubbles Attempts to control inflation Need to rebalance from exports to consumption Overvalued currencies 25
  • 26. China Is on the Edge of a Significant Slowdown Ridiculous Credit Expansion % OF GDP % OF GDP CHINA: 240 240 BANKING SYSTEM ASSETS 230 AS % OF GDP 230 220 220 210 210 200 200 % OF GDP % OF GDP SOCIAL FINANCING AS A % OF GDP 40 40 30 30 20 20 2002 2004 2006 2008 2010 2012Source: BCA Research, 2011 26
  • 27. Followed by Dramatic Credit Issues CHINESE CORPORATE SPREADS REAL ESTATE DEVELOPERS 50% Drop BANKS 45% Drop Source: JP Morgan Chase; BCA Research, 2011Source: MSCI Inc.; BCA Research, 2011 27
  • 28. Source: FactSet Research Systems; Ritholz, 2011 28
  • 29. Source: The Institute of International Finance, Ritholz, 2011 29
  • 30. Is It Any Wonder the World Teeters On Edge of Recession? Global Manufacturing Manufacturing Expanding 55 55 49 49 43 43 38 Manufacturing 38 Contracting 34 34 Year-to-Year Point Change 16 16 8 8 0 0 -8 -8 -16 -16 1998 99 00 01 02 03 04 05 06 07 08 09 10 11Source: Ned Davis Research, November 2011 30
  • 31. The US Market Is the Least Bad Place to Be Loan growth in every area but real estate Continuing private sector job creation Stabilized financial sector Ongoing Investment in innovation Massive potential energy supplies Emerging rescue of housing/mortgages  Principal forgiveness  Covered bonds/private mortgage market 31
  • 32. And Global Long-Term Prospects AreIncreasing Emerging market equities Natural resources Energy/alternative energy Emerging market debt “Northern Europe” assets Global blue chips Infrastructure 32
  • 33. Our Problems Lie in the Polarization andIneffectiveness of Our GovernmentSource: Wall Street Journal, November 2011 33
  • 34. Source: White House Office of Management and Budget; Congressional Budget Office; Ritholz, 2011 34
  • 35. Follow a Personal Financial Plan! Think through future financial sources and usesNear-term needs portfolio Long-term needs portfolio – Capital preserving – Core diversified strategy – Accept the implied yield – Active management Rolling 3 years Rolling 5-10 years 35
  • 36. Match Your Strategy to Your Situation Time horizon and resources: you or Harvard? Age and circumstances: what can you earn back? Allow for the unanticipated: health, family, business 36
  • 37. A Portfolio for September 2010Near-term needs Long-term portfolio Emerging Markets Debt, Intermediate-Term portfolio Domestic Fixed Income, 1.5% 3.0% Alternatives, 15.0% Total Return Fixed Income, 9.0% Real Estate, 1.9% Natural Resources, 3.8% Short-Term Domestic Inflation Protected Fixed Income, 16.5% Securities, 1.9%Cash, Near-term needs, Emerging Markets2.5% 19.0% Equities, 4.5% International Equities, 7.9% Domestic Equities, 32.6% 37
  • 38. But Don’t Stay There:Move with Opportunities and Threats• Accelerating Asian growth? Overweight industrial raw materials and energy• Slow domestic growth? Overweight global blue chips• Looming euro crisis? Reduce % of assets denominated in euro• Exploding nuclear plants? Invest in natural gas 38
  • 39. Fortunately, We Provide the Services that You Need Investment Management Family Office Services Stocks Retirement Planning Bonds Alternatives  Individuals  Families ETFs  BusinessesBusiness TransitionServices Mutual Funds Real Assets Risk Management Cash Management ▪ Insurance Services ▪ Asset-Protection Strategies Trust Services* 39
  • 40. Contango Provides ServicesThrough the Banks that Zions Owns 40
  • 41. Disclosures  This presentation is based on assumptions and market conditions known to Contango at the time this presentation material was prepared. Unless otherwise noted, all examples provided herein are hypothetical and for illustrative purposes only. Assumptions and market conditions are subject to change, which may affect Contango‟s final recommendation after an Investment Policy Statement has been developed with the client.  Unless the investment is a deposit of a bank and insured or guaranteed by the Federal Deposit Insurance Corporation or other government agency, investments used in portfolios created by Contango are subject to losses.  Return information provided is hypothetical unless otherwise indicated. Additionally, return information represents the opinion of Contango. Information provided is not intended to provide specific advice, nor to be construed as a recommendation with regard to any particular investment or to provide any guarantee of results. The information contained herein employs proprietary projections of expected returns. Past performance is no guarantee of future results.  When constructing portfolios, Contango may use certain components that are subject to quarterly, semi-annual or annual redemption provisions. This may affect the liquidity of the portfolio and availability of funds.  Contango is not responsible for any clerical, computational or other errors that may occur as a result of using data from outside sources, such as pricing information obtained from standard quotation services.  All dividends and distributions are reinvested in the asset classes indicated for each portfolio consistent with the weighting for that asset class.  If included in this presentation, model results do not represent actual trading and may not reflect the impact that material economic and market factors might have if Contango were actually managing your portfolio.  If performance figures are provided, they are gross of Contango‟s investment advisory fees and do not reflect costs and expenses associated with portfolio transactions or taxes. Actual portfolio returns would be reduced by Contango‟s investment advisory fees and other expenses incurred in the management of its investment advisory account. For example, if Contango were to manage a $1 million diversified portfolio from January 1, 2010 to December 31, 2010, an 8.00% annual return figure would be reduced by a management fee of approximately 1.38%. Contangos management fees differ according to size and nature of the specific investment portfolio. Please see Contangos Form ADV for full details. IMPORTANT NOTEIMPORTANT NOTE: Wealth management services are offered through Contango Capital Advisors, Inc. (Contango), a registered investment adviser and a nonbank subsidiary of Zions Bancorporation. Investments are not insured by the FDIC or any federal or state governmental agency, are not deposits or other obligations of, or guaranteed by, Zions Bancorporation or its affiliates, and may be subject to investment risks, including the possible loss of principal value of the amount invested. Some representatives of Contango are also registered representatives of Zions Direct, which is a member of FINRA/SIPC and a nonbank subsidiary of Zions Bank. Employees of Contango are shared employees of Western National Trust Company (WNTC), a subsidiary of Zions Bank and an affiliate of Contango. 41