The document discusses the history and future of quantitative easing programs. It notes that the end of the second quantitative easing program is approaching. It briefly reviews the effects of the end of the first quantitative easing program, when stock markets declined. The document suggests monitoring how markets respond when the current program ends, and considers what may happen given banks' current holdings of cash from quantitative easing versus other economic indicators like unemployment.

1. summitV I E W
The CosT of opporTunITy
by Ian Jameson
When you decide to pursue one action over another, the act you didn’t do is referred to as the
opportunity cost; what you could have been doing if you weren’t doing what you’re doing. Weighing this
cost after a decision has been made can lead to buyers’ remorse, or a validation of your action.
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An interesting series of questions arise from this line of thinking: How do you know what the opportunity
cost is? How do you know what you don’t know?
Much of modern financial theory has defined opportunity cost as the return that an investor would
receive from investing in a “risk-free” asset versus investing in a different financial asset. Investment
professionals have then divided assets into classes such as bonds, stocks, real estate, cash, natural
resources, foreign currency, collectibles and insurance products.
By this logic, the opportunity cost
1
for an equity investor would be
the return that they would receive
from holding bonds, real estate,
May
cash, etc. instead of their equity
investment. Defining the relative
returns of the various asset classes
2011
has been a bit of an art form as
well; services like Standard and
Poor’s and others provide indices
for a variety of asset classes, the
most familiar being the S&P 500,
an index based on 500 large
companies that trade in the US on
the NY stock exchange and the
NASDAQ. For many people, the
S&P 500 serves as a benchmark for
the concept of stock market return.
The opportunity cost for holding
cash or bonds, for example, would
be the return that you could have
generated if you’d invested in
stocks, approximated by the return
of the S&P 500.
Stepping back from modern
financial theory, the opportunity
cost for an equity investor also
includes the “return” that could
have been achieved by investing
in a local charity, re-insulating
your home, taking a week-long
backcountry trip, or sending your
child backpacking around Europe.
Quantifying these benefits is not
something that modern financial
theory, or anyone else, is able to
accurately model. However, there
are costs and benefits associated
with each potential investment.
When choosing how we donate,
see disclaimer on last page

2. where we vacation, if we spend now to save on the performance of your Growth-oriented Large-
future energy bills, and what we want our children cap mutual fund will yield some similar results,
to experience in life, we are looking to the future, but stepping back from America will offer some
seeking to improve upon all we’ve experienced until perspective:
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this point.
From Standard and Poor’s:
Looking to the future, then, is a very important part
of investing, as is incorporating past experience. If The S&P 500® has been widely regarded as the
we know the sugar high from a Krispy Kreme donut best single gauge of the large cap U.S. equities
is followed by a not-so-great crash, we’ll incorporate market since the index was first published in
that knowledge into our future decision making 1957. The index has over US$ 4.83 trillion
processes. If we know that financial assets tend to benchmarked, with index assets comprising
move in the same direction during periods of market approximately US$ 1.1 trillion of this total.
2
turmoil, that too can be incorporated into our future The index includes 500 leading companies
decision making process. in leading industries of the U.S. economy,
capturing 75% coverage of U.S. equities.
May 2011
A Benchmark for Investing? • The current market capitalization of the S&P
500: $12 trillion
We are somewhat constrained in our historical
knowledge of financial assets. Just as people have • Current market capitalization of stock markets
realized that the language we speak shapes the way in the World Federation of Exchanges: $55
we think, the language of investment also shapes trillion
our thought process.
• World financial assets---including equities,
Anyone who has ever invested in a mutual fund has private and public debt, and bank deposits
seen a diagram like this: according to McKinsey: $178 trillion in 2008
Value Blend Growth
• Size of the global derivatives market, according
to Paul Wilmott: $1,200 trillion.
Large
1000000 - million
1000000000 - billion
1000000000000 - trillion
1000000000000000 - quadrillion
Mid
Yeah, that’s $1.2 quadrillion........
So, the S&P 500 represents 22% of the stocks
traded in the world, 6% of world financial assets,
Small and is 1% the size of the global derivatives market.
Now, we are not suggesting that individuals need
to participate in some sort of collateralized debt
This diagram represents the universe of options
obligation investment to gain a broader investable
available to a mutual fund investor: style on the
universe (if you thought the Krispy Kreme hangover
horizontal axis, and market capitalization on the
was rough, try unwinding one of those contracts
vertical axis.
when it goes south). Rather, the point of the
Is an investor’s entire universe of possible exercise is to show what else exists in the world of
investments contained in a 3x3 box? The answer is financial assets, and how our perspective is shaped
Yes, and No. by what we know. As the 2011 Ibbotson SBBI
Classic Yearbook points out, “[a]n investor who
Is “the market” a proxy for investment performance? chooses to ignore investment opportunities outside
The answer is Yes, and No. the United States is missing out on over half of the
investable developed stock market opportunities in
Watching movement on the S&P 500 and comparing the world.”

3. As our knowledge increases, so too does our
understanding of the opportunity costs that we face as
investors. In that regard, our investments will change
to reflect what we’ve learned over time. When
America experienced an oil price shock in the 70s, We have historical data that shows what risk/
investment decisions incorporated the threat of higher reward relationships have looked like for a
fuel prices, auto makers produced vehicles that got variety of asset classes in the past, but what
will the opportunity cost be of holding these
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40+ mpg, and consumers invested in them. As fuel
prices declined and vehicles got larger and consumed asset classes in the future? For example, what
more fuel, we re-learned (or un-learned) some of the is the likelihood that large company stocks
lessons from the past and when fuel prices spiked will exceed their historical average returns
again, revisited a similar cycle. in the next five years? We consider the use
of historical data important in forecasting
Incorporating the longer term trends (i.e., oil as expected returns. However, we also believe
a finite quantity) with the shorter term cycles (fuel deviations from historical returns are likely
efficiency in vehicles) is a necessary part of an in any given long term period of time.
investment analysis. Defining an investable universe Forecasting asset class returns is just as much
3
means defining long term trends and cycles within art as science. Consideration of pertinent
those trends, then choosing assets that reflect socio-economic matters helps us to adjust
everything we’ve learned up until today, and putting historical returns to reflect our beliefs.
May 2011
resources towards assets that we believe will prosper
in the future. What will be the structural changes to the
economy as a result of these socio-economic
trends? How will the structural trends affect
What is your Benchmark? market performance over the long term?
Historically, investors have been taught that there Once again, a multitude of variables are in
is one “market portfolio,” which serves as the play, and any one person’s interpretation
benchmark for investing. Many have used the S&P of these variables will differ from another’s,
500 as the proxy for the “market portfolio.” The sometimes dramatically. As we wade through
percentage of one’s assets allocated to the “market data and interpret opinions on what trends are
portfolio” is determined by an individual’s risk being played out in the world, we will begin to
tolerance. We believe that no two investors, who determine the returns that we expect for each
differ in either risk tolerance or in their forecasts for asset class in our investable universe, and the
returns, will have the same investment strategy. level of uncertainty surrounding those returns.
Defining your risk tolerance is equally as important Once we’ve established our ideas about
as defining your investable universe, and has strong returns and the uncertainty of those returns, we
similarities: both will change over time given new can determine how much of each asset class
knowledge, understanding, global trends, and an investor should hold.
evolving investor circumstances. In determining if By assessing one’s risk tolerance and future
you’re a conservative or aggressive investor, you are financial needs, investors can construct
determining which aspects of the investable universe appropriate benchmarks for investment
will be larger parts of your portfolio. Determining performance. Once suitable benchmark
your asset allocation hinges on an interpretation of allocations have been determined, assets can
the risks and rewards associated with each asset class be allocated to reflect individual risk tolerance
in your investable universe. and return forecasts.
some perTInenT soCIo-eConomIC vArIABles:
- growth of global middle class and global markets
- ageing population demand for entitlements
- political will to adjust governmental entitlement obligations
- debt levels in the public and private sectors
- deficit spending by local, state, and federal governments
www.summitcreekcapital.com

4. ConsCIenTIousinvesting
by penny mandell starting to embrace impact investing At Summit Creek Capital we focus
is that traditionally they invested on returns in the broadest sense,
For many investors, if you discuss purely to optimize risk based returns that means both bottom line and
“Socially Responsible Investing” with no thought to social factors, social impact are important to us.
the immediate assumption is that and on the philanthropy side they Rather than viewing impact investing
this is synonymous with sub par are used to investing to maximize as a restrictive process we view it as
profitability and that it is the bastion social impact with no expectation of a proactive portfolio choice.
of tree huggers and nuns. It also financial return.
conjures up a process of creating
exclusionary screens designed to
weed out morally reprehensible The glow of doing a social good
practices like drinking, gambling, mixed with high returns would
weapons manufacture and child seem attractive to high-net-worth
labor. These perceptions may have individuals. But impact investing
been true at one time but there is is still in its infancy. The Global
Impact Investing Network, a
a big change underway and this nonprofit group, said that current
change offers exciting opportunity. impact investments amounted
to about $50 billion. It projects
There is an increasing investor this area to grow to $500 billion
awareness that you can actually do by 2014, putting it at roughly 1
well while doing good. percent of all managed assets.
Impact investing is the term “I think the tipping point is now,”
given to the practice of directing said Camilla Seth, director of
investment portfolios to solve social programs and operations for The
and environmental problems as Global Impact Investing Network.
well as generating a return on the “This activity has been happening
investment. for 10 years but investors have
been insulated.”
True impact investing is really
more about effecting positive
change through investment and Combining philanthropic ideology We too feel that we are at a tipping
creating positive results beyond with investment savoir-faire, impact point here. The $500 billion [see
the financials. Impact investing investing — actually the intersection box above] estimate clearly indicates
can be a powerful complement to of these two concepts — creates a that there is potential for large
philanthropic and governmental very powerful engine for change. amounts of capital movement, and
spending. The reason a lot of The philanthropist is targeting right now there is a lot of innovative
institutional investors are just now money at specific needs with no thinking about how to best achieve
expectation of profit; this. We have been actively
it is money that is working with various experts in this
given away. The burgeoning space and are excited
3 T his is noT your investor is targeting about the ongoing opportunities.
’ .
investments for
moTher s book club maximal profits with Education is a critical part of this
no goal to alleviate process for both individuals and
broader social institutions. It’s exciting to show
problems. Impact that the impact investors can have
Penny Mandell has created a fun and investing allows for extends far beyond the bottom line
provocative environment for becoming targeting specific and will be the catalyst for solutions
financially fluent. solutions while still to many of our planets most
generating a profit. pressing problems.
This is an exciting
3 concept for many What issues are you most
individuals who
fluent females focused on
flourishing fiscally typically keep their
passionate about?
philanthropic funds
segregated from their
visit www.f3blog.com to learn more investment funds.

5. Where We’ve Been,
summitVIEW
Where We’re Going by matt mcneal
With the shutdown of the second round of without wage growth?).
Quantitative Easing (QE2) looming at quarter’s Banks have received large amounts of cash, though
5
end, investors are wondering what the equity it isn’t totally clear what they have done with it. We
markets will look like when the Federal Reserve don’t attempt to answer that question, instead we
halts the massive liquidity program. As a brief offer our observations of what happened when
May 2011
refresher, Quantitative Easing is when the Federal round 1 of QE ended and what might happen
Reserve Bank prints money (just creates it out of when QE2 closes. It sounds cliche, but before
thin air), and uses the newly minted dollars to buy we look at what might happen in the future, it is
assets from banks (mostly Treasury bonds).Where useful to take a look at the past - in this case the
the bank used to be sitting on a pile of Treasury first round of Quantitative Easing - how the market
bonds, they are now sitting on a pile of cash. The reacted when that program ended, and how the
theory is that banks will push this new money out market responded to the possibility of QE2. In
their doors as loans, circulating it into the economy, the green box below is a short piece we wrote in
thus jumpstarting a sustainable recovery. Well December 2010 taking a look at the effects both
- some things have jumpstarted (stock market, QE programs have had on the market. Note that
we’re lookin’ at you), while other things remain we did not perform any correlation calculations
stubbornly stagnant (unemployment) and others or higher math of any sort - just pinpointed some
defy explanation (consumer spending expansion dates on a chart of the S&P 500 index.
That was then... the Federal Reserve will do anything The first round of Quantitative Easing
The economy seems to have subtly to keep the stock markets propped (now known as QE1) essentially ran
turned a corner heading into the last up. It is telling to look at a chart of from late 2008 until the end of the
weeks of 2010. Consumer and Business the S & P 500 over the last year, and 1st Quarter in 2010. Clearly, the
Leader Sentiments are up, the major pick out a few important dates on the market did not appreciate the program
indexes have surpassed the highs Quantitative Easing timeline to review. ending. After a steep selloff and a
reached over the summer, and have
achieved levels not seen since the days
before Lehman Brothers went down in QE2 Officially
Announced
flames. Has the US finally shrugged
off the anchor of the Great Recession
and returned to sustainable long term
growth? We remain skeptics, but some
of the recent global improvements have
kept us from turning into outright cynics
(well, some of us anyway). Certainly
there are areas in the global economy
that will provide attractive opportunities,
and it is these areas where we focus our Bernake’s Speech
efforts. QE1 Ends
However, if there is one thing that we
have learned (because it has been
hammered into our skulls) it is that www.summitcreekcapital.com

6. summitVIEW
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summer of rangebound returns, budging the stubbornly high to argue with. Again, please
May 2011
Ben Bernanke made a speech in unemployment, but as the chart reference the above chart.
Jackson Hole, WY in which he above shows the old adage The unemployment rate may
hinted that if necessary, the Fed “Don’t Fight the Fed” clearly still be stuck near 9%, consumer
would not hesitate to engage in applies in the equity markets. sentiment may be stuck well
another round of Quantitative below the levels associated with
Easing. In the speech he tried Way back in January 2010, any previous recovery in recent
to stress that the Federal the Economist Magazine history, and any other of a
Reserve believed the economy featured a cover story accusing number of economic indicators
was strongly recovering and central bankers of pumping may be pointing to prolonged
probably would not need the up asset bubbles through pain, but clearly the stock
additional stimulus. The two monetary stimulus. Europe market responded well to the
months that followed that seems to be chastised (through Federal Reserve’s programs over
speech were a bizzaro world for necessity) into taking the the past two years.
equities (not that it hasn’t been austerity approach - tax hikes
bizarre for longer than that). and spending cuts on the On top of the monetary stimulus
Headlines that suggested the fiscal side, and the discipline provided by Quantitative
economy was not improving of the common currency on Easing, the President recently
were greeted with strong run- the monetary side (though signed fiscal stimulus into law in
ups in market indexes, as Great Britain maintains an the form of tax cut extensions.
investors believed that the poor independent currency it is also Worth $858 billion, will these
news reflected a greater chance choosing the austerity path). tax cuts also help to prop up
for QE2, thus a greater chance The United States has chosen to equity markets? Once again, the
of a Federal Reserve driven bull punt these difficult decisions to government is pushing serious
market. Good economic news future generations, and decided reform down the road in order
(admittedly sparse) was seen as the best way to get out of a to maintain the status quo.
a sign QE2 would not happen, debt induced economic crisis
and paradoxically reduced is to borrow and spend more. At this point, the best course of
investors’ enthusiasm for risk While the long term wisdom of action may be to drink the Kool-
assets, sending markets down. this strategy is rightly questioned Aid and enjoy the ride up.
by responsible thinkers, the
The Federal Reserve may not short term effects of the fiscal
have had much success in and monetary steroids are hard

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This is now................................
With the benefit of hindsight, drinking that Kool-aid and
going all in was a good idea. Below is an updated version
of our original chart, with the market returns extended to the
7
beginning of April 2011. The gains continued from the time of
Bernanke’s WY speech until Spring of this year.
May 2011
QE2 Officially
Announced
QE1 Ends Bernake’s Speech Mid-East Uprisings,
Nuclear Meltdowns, etc
It took radical uprisings in the Middle East and an earthquake,
tsunami and nuclear meltdown in Japan to derail the relentless
upwards march of the market, and even then it couldn’t knock
it down for long. There are US military forces actively fighting in
Libya and radioactive water leaking into the Pacific Ocean even
as we type, and the market is rallying. That Quantitative Easing
is powerful stuff!
Not to overstate the importance of QE2, there have been
some data prints that point to a strengthening economy. Lower
unemployment, a hint of price inflation (which would be a
good thing now), increased labor productivity and increasing
ISM manufacturing survey numbers have given investors some
optimism that the US is edging towards a sustainable recovery.
Of course there are two ways to look at each one of these
statistics, but that may be the subject of another paper.
www.summitcreekcapital.com

8. We aren’t the only ones thinking about the end of Quantitative Easing. A quick, unscientific
internet search turns up scores of articles which, true to form for anything to do with
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forecasting, are all over the map. As an example, these two headlines appeared right next to
each other on the first page of a Google search (quotes added for flavor):
End of QE2? no ProblEm for StockS
VS.
[bill] GroSS WarnS QE2’S End
could Sink markEtS
“The economic recovery is much
stronger than most give it ”By eliminating QE II, the
credit for, and so much of the
8
Fed would be ripping a
talk about the end of QE2 Band-Aid off a partially
is factored in already,” said healed scab,” Gross
Ryan Detrick, senior technical
May 2011
writes. “Ouch!”
strategist at Schaeffer’s
Investment Research, whose
forecasts puts the S&P 500 up
another 6% by the end of the year.
So which story is more believable? Well, if our Reserve, by keeping the interest rate target pegged
past experience with the withdrawal of the Federal at the 0% to 0.25% level, has forced investors into
Reserve liquidity program is any sort of guide risk assets in order to realize any sort of return.
for the future, we might be in for another rough The reward for holding Treasury bonds is simply
summer in the equity markets. Of course, as every too low, even for traditionally risk-averse investors.
investment professional knows, past performance Hence they are forced to seek yield in riskier assets
is not a guarantee of future results, but in this like common stock and corporate bonds. This, of
case it certainly deserves attention. Even if the course, is part of the goal for the Federal Reserve,
economy has truly recovered enough to stand on and one of the reasons we ended up with QE2 - to
its own two metaphorical feet, quitting the QE drug support the equity market. The major indices (Dow,
cold turkey is not going to be easy and perhaps S&P 500, NasDaq) are collectively taken as a
withdrawal really is the right word to use in this bellwether for the economy as a whole. When they
case. Take Barry Bonds as a comparison - one are plummeting, no one feels confident.
year he is pumped up on performance enhancers,
breaking records and feeling great, then he quit It might help to take a look at some widely read
the juice and the next thing he knows he is in a economic indicators to see how they compare to
courtroom listening to humiliating questions about this time last year, when the Fed was on the verge
the changing size of parts of his anatomy. He of ending QE1.
isn’t dead, but clearly isn’t the star performer he
once was. Will the markets behave differently or
continue to be a star performer? March 2010 March 2011
Unemployment Rate 9.7 8.8
To be clear, if the market is healthy enough to ISM PMI Index 60.4 61.2
withstand the ending of QE, then the program
should end as soon as possible. We are simply Consumer Sentiment 52.3 63.4
questioning what the aftermath of the withdrawal
will look like. Ending the program was never going There has been some improvement in each of
to be easy, and if anything keeps the Bernank (sic) these metrics over this time last year. It isn’t a rosy
up at nights, it is this very problem. The Federal recovery, but its not doom & gloom either. Just sort
of...sideways.
Disclaimer: All material presented herein is believed to be reliable but we cannot attest to its accuracy. Neither the information nor any opinion expressed constitutes a solicitation by us for the purchase or sale of any securities.