Investment Outlook 2010 03 For Public

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Lighthouse Investment Management Investment Outlook - March 2010

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Investment Outlook 2010 03 For Public

  1. 1. Investment Outlook<br />March 2010<br />© 2010 Lighthouse Investment Management<br />
  2. 2. August 12, 2008<br /><ul><li>Dear investors, dear friends:
  3. 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. 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. 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. 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. 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. 8. With best regards,</li></ul>2<br />(c) Lighthouse Investment Management<br />3/24/2010<br />
  9. 9. August 15, 2008 – March 12<br />3<br />(c) Lighthouse Investment Management<br />3/24/2010<br />
  10. 10. Just 3 bits of information<br />4<br />(c) Lighthouse Investment Management<br />3/24/2010<br />Consumer = 2/3of GDP<br />Impact of MEW on GDP<br />Future of residential home prices (Whitney Tilson)<br />Ignore everything else (e.g. Bernanke, Paulson)<br />
  11. 11. “Person of the Year” 2009:<br />5<br />(c) Lighthouse Investment Management<br />3/24/2010<br />
  12. 12. Statements by Paulson/Bernanke<br /><ul><li>July 12th, 2007 – Paulson: "This is far and away the strongest global economy I've seen in my business lifetime.”
  13. 13. August 1st, 2007 – Paulson: "I see the underlying economy as being very healthy,“
  14. 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. 15. February 14th, 2008 – Paulson: (the economy) "is fundamentally strong, diverse and resilient.“
  16. 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. 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. 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."</li></ul>6<br />(c) Lighthouse Investment Management<br />3/24/2010<br />
  19. 19. Statements by Paulson/Bernanke<br /><ul><li>Mar 18th, 2008 - Bear Stearns Bailout Announced
  20. 20. May 7, 2008 – Paulson: 'The worst is likely to be behind us,”
  21. 21. May 16th, 2008 – Paulson: "In my judgment, we are closer to the end of the market turmoil than the beginning," he said.
  22. 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. 23. July 16th, 2008 – Bernanke: (Freddie and Fannie) “…will make it through the storm”, "… in no danger of failing.","…adequately capitalized“
  24. 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. 25. August 10th, 2008 – Paulson: ``We have no plans to insert money into either of those two institutions.” (Fannie Mae and Freddie Mac) 
  26. 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. 27. September 16th, 2008 - $85 Billion AIG Bailout “Loan”
  28. 28. September 19th, 2008 - $700 Billion Bailout Plan Announced </li></ul>7<br />(c) Lighthouse Investment Management<br />3/24/2010<br />
  29. 29. 8<br />The Economy<br />(c) Lighthouse Investment Management<br />3/24/2010<br />
  30. 30. US Economy: 4 things to know<br />9<br />(c) Lighthouse Investment Management<br />3/24/2010<br /><ul><li>This is not a typical recovery
  31. 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. 32. Fiscal stimulus to wear off in 2010-11
  33. 33. Inventory cycle</li></li></ul><li>GDP = Consumption = Employment<br />10<br />(c) Lighthouse Investment Management<br />3/24/2010<br />
  34. 34. 2016: Recovery from Lost Jobs<br />11<br />(c) Lighthouse Investment Management<br />3/24/2010<br />
  35. 35. Federal Withholding Taxes %yoy<br />12<br />(c) Lighthouse Investment Management<br />3/24/2010<br />
  36. 36. US vs. Japanese Housing Bubble<br />13<br />(c) Lighthouse Investment Management<br />3/24/2010<br />
  37. 37. US: Debt by Sector<br />14<br />(c) Lighthouse Investment Management<br />3/24/2010<br />
  38. 38. US: Path to losing AAA<br />15<br />(c) Lighthouse Investment Management<br />3/24/2010<br />
  39. 39. Fed Financed 91% of 2009 Deficit<br />16<br />(c) Lighthouse Investment Management<br />3/24/2010<br />
  40. 40. Fed Balance Sheet: Maturities<br />17<br />(c) Lighthouse Investment Management<br />3/24/2010<br />
  41. 41. US economy: GDP calculation<br />18<br />Production = Sales + Inventory changes<br />(c) Lighthouse Investment Management<br />3/24/2010<br />
  42. 42. US Economy: Inventory Cycle<br />19<br />(c) Lighthouse Investment Management<br />3/24/2010<br />
  43. 43. GDP: Production vs. Sales<br />20<br />(c) Lighthouse Investment Management<br />3/24/2010<br />
  44. 44. Inventory effect in Q4 2009: 3.9%<br />21<br />(c) Lighthouse Investment Management<br />3/24/2010<br />
  45. 45. Fiscal stimulus: 1.9% of GDP<br />22<br />(c) Lighthouse Investment Management<br />3/24/2010<br />
  46. 46. US economy: Capacity Utilization<br />23<br />(c) Lighthouse Investment Management<br />3/24/2010<br />
  47. 47. 24<br />The Consumer<br />(c) Lighthouse Investment Management<br />3/24/2010<br />
  48. 48. Mortgage Equity Withdrawal (MEW)<br />25<br />(c) Lighthouse Investment Management<br />3/24/2010<br />
  49. 49. Homeowner Equity<br />26<br />(c) Lighthouse Investment Management<br />3/24/2010<br />
  50. 50. US Consumer and Trade Balance<br />27<br />(c) Lighthouse Investment Management<br />3/24/2010<br />
  51. 51. US Consumer: Taxes, Savings<br />28<br />(c) Lighthouse Investment Management<br />3/24/2010<br />
  52. 52. US Consumer: Confidence<br />29<br />(c) Lighthouse Investment Management<br />3/24/2010<br />
  53. 53. US Fiscal Revenues vs. Expenses<br />30<br />(c) Lighthouse Investment Management<br />3/24/2010<br />
  54. 54. Japan: 20 Years After Bubble Burst<br />31<br />(c) Lighthouse Investment Management<br />3/24/2010<br />
  55. 55. US Inflation: Velocity collapses<br />32<br />(c) Lighthouse Investment Management<br />3/24/2010<br />
  56. 56. Securitization of Debt: collapsed<br />33<br />(c) Lighthouse Investment Management<br />3/24/2010<br />
  57. 57. US Inflation: TIPS Break-even Rates<br />34<br />(c) Lighthouse Investment Management<br />3/24/2010<br />
  58. 58. GDP Growth Drives Bond Yields<br />35<br />(c) Lighthouse Investment Management<br />3/24/2010<br />
  59. 59. US banks: Mark-to-mystery<br />36<br />(c) Lighthouse Investment Management<br />3/24/2010<br />
  60. 60. US banks: FDIC is Out of Money<br />37<br />(c) Lighthouse Investment Management<br />3/24/2010<br />
  61. 61. US Trade Balance: Goods<br />38<br />(c) Lighthouse Investment Management<br />3/24/2010<br />
  62. 62. US Trade Balance: Services<br />39<br />(c) Lighthouse Investment Management<br />3/24/2010<br />
  63. 63. US Trade Balance: Total<br />40<br />(c) Lighthouse Investment Management<br />3/24/2010<br />
  64. 64. US Trade Deficit excl. Oil<br />41<br />(c) Lighthouse Investment Management<br />3/24/2010<br />
  65. 65. International Indebtedness<br />42<br />(c) Lighthouse Investment Management<br />3/24/2010<br />
  66. 66. Europe: Imbalances<br />43<br />(c) Lighthouse Investment Management<br />3/24/2010<br />
  67. 67. Europe: Debt Burden<br />44<br />(c) Lighthouse Investment Management<br />3/24/2010<br />
  68. 68. Europe: Greece = Time Bomb<br />45<br />(c) Lighthouse Investment Management<br />3/24/2010<br />
  69. 69. Europe: Debt Solves Deficits?<br />46<br />(c) Lighthouse Investment Management<br />3/24/2010<br />
  70. 70. China: Hangover to Come<br />47<br />(c) Lighthouse Investment Management<br />3/24/2010<br />
  71. 71. China: Unsustainable Growth<br />48<br />(c) Lighthouse Investment Management<br />3/24/2010<br />
  72. 72. China: Exports<br />49<br />(c) Lighthouse Investment Management<br />3/24/2010<br />
  73. 73. 50<br />(c) Lighthouse Investment Management<br />3/24/2010<br />The Stock Market<br />
  74. 74. US Stock Market Cycles<br />51<br />(c) Lighthouse Investment Management<br />3/24/2010<br />
  75. 75. Bear markets<br />52<br />(c) Lighthouse Investment Management<br />3/24/2010<br />
  76. 76. US Stock Market: Valuation<br />53<br />(c) Lighthouse Investment Management<br />3/24/2010<br />
  77. 77. Stock Market Valuation: Rob Shiller<br />54<br />(c) Lighthouse Investment Management<br />3/24/2010<br />
  78. 78. US Stock Market: The 1970’s<br />55<br />(c) Lighthouse Investment Management<br />3/24/2010<br />
  79. 79. US Stock Market: The 1990’s<br />56<br />(c) Lighthouse Investment Management<br />3/24/2010<br />
  80. 80. US Stock Market: The 2000’s<br />57<br />(c) Lighthouse Investment Management<br />3/24/2010<br />
  81. 81. Valuation matters<br />58<br />(c) Lighthouse Investment Management<br />3/24/2010<br />
  82. 82. Why Not a New Bull Market?<br />59<br />Source: David Rosenfeld, Gluskin Sheff<br />(c) Lighthouse Investment Management<br />3/24/2010<br />
  83. 83. Commodities: Oil<br />60<br />(c) Lighthouse Investment Management<br />3/24/2010<br />
  84. 84. Commodities: Gold<br />61<br />(c) Lighthouse Investment Management<br />3/24/2010<br /><ul><li>All gold ever mined (163k t) would fill only 1/3 of Washington Monument (17% available for investing)
  85. 85. Storage (bankrupt bank, at home, securitized, abroad)
  86. 86. Denominations?
  87. 87. Fair price?
  88. 88. 2009: 594t demand from ETF’s (170t bars, 234t coins)
  89. 89. GLD is second largest ETF in the US ($38bn)
  90. 90. April 5, 1933, Roosevelt: Forbidding the Hoarding of Gold Coin, Gold Bullion and Gold Certificates</li></li></ul><li>Exchange Traded Funds (ETF)<br />62<br />(c) Lighthouse Investment Management<br />3/24/2010<br />
  91. 91. Gold demand by ETF<br />63<br />(c) Lighthouse Investment Management<br />3/24/2010<br />
  92. 92. 64<br />The Investor<br />(c) Lighthouse Investment Management<br />3/24/2010<br />
  93. 93. What has changed, really?<br />65<br />(c) Lighthouse Investment Management<br />3/24/2010<br />
  94. 94. Summary<br /><ul><li>Stocks: expensive – 7 more lean years
  95. 95. Bonds: expensive – some value in investment grade
  96. 96. Commodities: expensive
  97. 97. Money market / bank CD’s: low yield
  98. 98. Muni’s: low yields, risk of bankruptcies, tax change
  99. 99. Real estate: Market distorted by REO / banks
  100. 100. Currencies: in race towards bottom, USD smallest evil Solution: “hibernate”, not lose money
  101. 101. LQD, options strategies</li></ul>66<br />(c) Lighthouse Investment Management<br />3/24/2010<br />
  102. 102. Big Questions:<br />67<br />(c) Lighthouse Investment Management<br />3/24/2010<br /><ul><li>Inflation or deflation?
  103. 103. Emerging or Developed Markets?
  104. 104. China: Driver or drag? Banking crisis?
  105. 105. Oil shackle: Nuclear, solar and wind?
  106. 106. Taxes: Only way is up?
  107. 107. Political stability: social unrest?
  108. 108. Sovereign defaults: Argentina, Venezuela, Eastern Europe?</li></li></ul><li>Core Investment: LQD (ETF)<br />68<br />(c) Lighthouse Investment Management<br />3/24/2010<br /><ul><li>Passively managed fund with very low fees (0.15%)
  109. 109. Replicates US investment grade corporate bond index
  110. 110. Highly liquid (>1m traded daily)
  111. 111. Income taxed as dividends; never paid out cap. gains
  112. 112. Current yield 5.3% (3/11/2010)
  113. 113. Largest position <1.2% of fund
  114. 114. Very low transaction cost (free at Fidelity)</li></li></ul><li>Corporate bonds: yields < Treasury<br />69<br />(c) Lighthouse Investment Management<br />3/24/2010<br />*) Comparable Treasury bonds<br />
  115. 115. LQD: Profile<br />70<br />(c) Lighthouse Investment Management<br />3/24/2010<br />
  116. 116. LQD: Top 10 Holdings<br />71<br />(c) Lighthouse Investment Management<br />3/24/2010<br />
  117. 117. LQD: Premium to NAV<br />72<br />(c) Lighthouse Investment Management<br />3/24/2010<br />
  118. 118. Other ETF’s and Rates<br />73<br />(c) Lighthouse Investment Management<br />3/24/2010<br />
  119. 119. Option Strategies<br />74<br />(c) Lighthouse Investment Management<br />3/24/2010<br /><ul><li>Earn money in declining or sideways markets
  120. 120. Harvest “time value” of options
  121. 121. 80% of options expire worthless
  122. 122. Define and limit maximum risk in advance</li></li></ul><li>Option Strategy: Short Puts LQD<br />75<br />(c) Lighthouse Investment Management<br />3/24/2010<br />
  123. 123. Option Strategy: Bear Call Spread<br />76<br />(c) Lighthouse Investment Management<br />3/24/2010<br />
  124. 124. Option Strategy: Iron Butterfly <br />77<br />(c) Lighthouse Investment Management<br />3/24/2010<br />
  125. 125. Option Strategy: Iron Butterfly <br />78<br />(c) Lighthouse Investment Management<br />3/24/2010<br />
  126. 126. Option Strategy: Flock of Butterflies<br />79<br />(c) Lighthouse Investment Management<br />3/24/2010<br />
  127. 127. A Perfect Match <br />80<br />(c) Lighthouse Investment Management<br />3/24/2010<br />&<br />
  128. 128. Why Fidelity? <br />81<br />(c) Lighthouse Investment Management<br />3/24/2010<br /><ul><li>Cost-efficient, user-friendly, online / mobile access
  129. 129. Tax return software automatically downloads data
  130. 130. Pooling of accounts for efficient money management
  131. 131. Assets covered up to $500,000 by SIPC (t/o $100k cash)
  132. 132. Additional protection up to $1bn via Lloyds of London</li></li></ul><li>Why Fidelity? <br />82<br />(c) Lighthouse Investment Management<br />3/24/2010<br /><ul><li>Products: 401k, IRA’s, 529’s, Mutual Funds (1,400 commission-free), Annuities, Life Insurance
  133. 133. $8 online US stock trades
  134. 134. 25 commission-free ETF’s
  135. 135. Commission-free US Treasury Bills, Notes, Bonds, TIPS
  136. 136. International investing (12 markets, 8 currencies)
  137. 137. Minimum deposit: $2,500</li></li></ul><li>Commission-free ETF’s <br />83<br />(c) Lighthouse Investment Management<br />3/24/2010<br />
  138. 138. Customizable Charts and Data <br />84<br />(c) Lighthouse Investment Management<br />3/24/2010<br />
  139. 139. Lighthouse Investment Management <br />85<br />(c) Lighthouse Investment Management<br />3/24/2010<br /><ul><li>Money and assets remain in your account – at Fidelity
  140. 140. Lighthouse obtains trading permission
  141. 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</li></li></ul><li>What to expect <br />86<br />(c) Lighthouse Investment Management<br />3/24/2010<br /><ul><li>Protect wealth
  142. 142. Investment strategy tailored to individual risk preference
  143. 143. Mid-single digit returns p.a.
  144. 144. Absolute (positive) return
  145. 145. Low volatility</li></li></ul><li>What NOT to expect <br />87<br />(c) Lighthouse Investment Management<br />3/24/2010<br /><ul><li>Tracking performance of stock indices like Dow Jones or S&P 500 (cheaper ways to do that, e.g. SPY)
  146. 146. Relative return (no benchmarking)
  147. 147. Individual stock picking (or advice)
  148. 148. Tax optimization (taxes likely to change)</li></li></ul><li>Lighthouse Investment Management <br />88<br />(c) Lighthouse Investment Management<br />3/24/2010<br />*) by churning your assets<br />**) High water marks<br />
  149. 149. Lighthouse Investment Management <br />89<br />(c) Lighthouse Investment Management<br />3/24/2010<br />Thank you.<br />

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