Transcript the September Review

Monthly Market Review
“Stormy Weather Should Provide
A Buying Opportunity”
(An Evaluation of the New Rising Rate Environment)
September 19, 2013
Kevin M. Wilson, ChFC, PhD
President/CEO/CIO
1405 Medical Arts Building
324 W. Superior Street
Duluth, MN 55802
Dheenu Sivalingam, MBA
AVP/CCO/Senior Analyst
Ted A. Pavlovich, WMS
VP Wealth Management
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Office: 218-464-4399
Toll Free: 877-327-5062
Fax: 218-464-4397
Email: [email protected]
www.bluewatercapitaladvisors.com
INTRODUCTION
TED A. PAVLOVICH
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MINNESOTA GIFT/ESTATE
TAX CHANGES
TED A. PAVLOVICH
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Federal & State Laws Impose
Estate Tax to Prevent Oligarchy
(With Limited Results)
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Some States (e.g., MN)
Are Worse Than Others
MN Estate Tax Rules
1) Maximum state death tax rate 16%
2) $1 million exemption amount
3) Not aligned with federal tax code
4) Gift tax set at 10%
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ASIAN CURRENCY CRISIS
CAUSES UNCERTAINTY,
BUT WE CAN INVEST
ELSEWHERE
DHEENU V. SIVALINGAM
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Epicenter of the crisis is moving towards EM Countries
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When the liquidity tide turns, EM assets are hurt
EM assets (both bonds and equities) have suffered strong outflows this year. However, these
outflows remain minor compared to cumulative inflows over the last 5 years. So potentially,
much more outflows should be expected when the Fed effectively tightens its policy.
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EM: structural issues (deficits) driving crisis
The bull story has turned sour in some emerging markets as external balances have
deteriorated. Countries with a deteriorating external balance have seen their currencies
depreciated strongly since 22 May (e.g. India).
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EM currencies now fully floating
Compared to historical crises in EM countries, fewer and fewer EM currencies are directly
pegged to the USD. While this may be a source of vulnerability in times of market turmoil, it
has helped EM countries absorb external shocks more easily.
As always, the market will concentrate on the weakest countries, putting their currency under
strong pressure and drying up liquidity.
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EM equities: do not catch the falling knife yet!
(unless it’s just a trade)
EM equities started to correct in 2010, when they traded at a premium of around 20% relative to
developed markets (as measured by the price to book value ratio).
We continue to stay away from EM equities (despite a 24% discount), as outflows are running at
high levels.
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What Really Happened
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Massive austerity in Europe
Europe’s current account, which has swung from a deficit of
almost $100 billion in 2008 to a surplus of almost $300
billion this year.
This extraordinary swing of almost $400 billion in the
Eurozone’s current-account balance did not result from a
“competitive devaluation”; the euro has remained strong. So
the real reason for the eurozone’s large external surplus today
is that internal demand has been so weak that imports have
been practically stagnant over the last five years (the average
annual growth rate was 0.25%).
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Who will run deficits??
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As capital withdraws from EM they will be
forced to go in to austerity mode
Europe is already in austerity mode, & China is
yet to turn into a consumer economy
But who will then be able – and willing – to run
deficits?
Unless the US resumes its role as consumer of
last resort, global economic recovery will be
weaker
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GEOPOLITICAL CONCERNS
CAUSE UNCERTAINTY, BUT
WE CAN HEDGE THE RISK
KEVIN M. WILSON
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Arab Spring Has Made
Egypt Highly Unstable
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Syrian Civil War Is Really A
Proxy for the Sunni-Shiite War
World War I Started
In A Similar Way
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If Iran-Saudi Struggle Escalates, Oil Prices Will Rise
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But Inventories Are Falling
And Spare Capacity Is Low
(Due to Shutdowns in Libya,
Iraq, Nigeria, Syria, Iran)
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Sino-Japanese Conflict Could Escalate
Backdrop
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Hedging Strategy For Geopolitical Risks
1.
2.
3.
4.
5.
For Egypt/Syria/Middle East Crises Buy Oil Stocks
For Egypt/Syria/Middle East Crises Buy Defense Stocks
For Egypt/Syria/Middle East Crises Buy Gold
For China-Japan Dispute Buy Defense Stocks
For China-Japan Dispute Buy Nikkei/Short Yen
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ECONOMY IMPROVES, FED
TAPERS (NOT), RATES RISE,
STOCKS RALLY
KEVIN M. WILSON
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Four Main Economic Indicators Rising,
But Real Income Impacted By Taxes
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Fed Is Concerned About
Structural Weakness In
The Economy
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Fed Also Concerned (Not Enough)
About Impact Of QE On Markets
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Fed’s Threat To Taper QE
Caused A Huge Change in
Mortgage & Treasury Rates
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Goldman Sachs Says Stocks Will Now
Move Into A Low Volatility Upward Trend,
Analogous To What Happened In 1982-1987
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SUMMARY
1) Fed has threatened to taper back on QE, driving rates up by over 1.25%
2) Markets deemed by Fed to have over-reacted, hence no decision yesterday
3) Global equities should rally based on the delay in tightening; however, tapering
will still happen sometime soon as the economy improves
4) The Emerging Markets crisis will fade temporarily, but it will soon get even worse
5) The Middle East crises will probably spread, affecting oil prices for some time
6) The Sino-Japanese conflict will be dangerously escalated if their respective economies
start to decline
7) The best solution is to significantly increase stock allocations over the long term;
hedges against the above risks can be put in place using oil stocks, defense
stocks, developed country stocks, and gold
KEVIN M. WILSON
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Q&A
KEVIN M. WILSON
TED A. PAVLOVICH
DHEENU V. SIVALINGAM
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Disclaimer
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.”
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