3Q 2015 INVESTMENT OUTLOOK

3Q 2015 INVESTMENT OUTLOOK George T. Cook Managing Director  Institutional Consultant 760 West Main Street, Suite 200 Barrington, Illinois 60010 Ph:  ...
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3Q 2015 INVESTMENT OUTLOOK George T. Cook Managing Director  Institutional Consultant 760 West Main Street, Suite 200 Barrington, Illinois 60010 Ph:  847‐382‐6608   email:  [email protected]

Carl H. Viard Senior Vice President Institutional Consultant Ph:  847‐382‐3762  email:  [email protected]

3Q 2015 Investment Outlook • • • • • • •

Greece  ……………………………………………….      3 China  ………………………………………………….      4 Iran     ………………………………………………….      6 Energy   ……………………………………………….      8 Capital Markets   .…………………………………   13 Economic Outlook .………………………………   21 Potential Opportunities   .……………………..   29

2

Greece

Another Greek Bailout The New Face of Austerity Austerity Impact

Old

New

Value Added Tax: Hotels / Food / Energy

6.5%

13%

Restaurants / Catering

13%

23%

€60 /Day

€420/Week

Bank Withdrawal Retirement Age

62

€86 Billion bailout increases debt to 180% of GDP

67

Pension > €2000

40% less

Pension < €1000

14% less

Source: Reuters, Bloomberg 07‐09‐2015

Greece Q3 2015 Investment Outlook

3

China Chinese “A” Shares

24% Loss in Less than One Month

$3.2 Trillion Loss in Market Value

Source: Quandle 7‐16‐2015 A‐shares are listed on the Shanghai exchange and are largely available only to domestic investors.  H‐shares are listed on the Hong Kong Stock Exchange; they are available mainly to non‐Chinese

China Q3 2015 Investment Outlook

4

China

“China can have a bull market or a bear market at the same time it has the opposite behavior in its economy. So don’t bet on those linkages” Ray Dalio, Bridgewater Associates

Source: Federal Reserve Bank of Dallas 06‐15‐2015

China Q3 2015 Investment Outlook

5

Iran

2nd Largest Natural Gas 18% of World’s Reserves

4th Largest Crude Oil 10% of World’s Reserves

Map: Wikimedia Commons, Graph: EIA 01‐2015

Iran Q3 2015 Investment Outlook

6

Iran Iran Treaty Releases Sanctions on Oil Sales

Iran must show by October 15 that it has met its commitments and the International Atomic Energy Agency hopes to issue a final report by December 15.

Tehran can add 1 million b/d of crude -within months of sanctions being lifted. Bijan Zanganeh, Iran Oil Minister

Source: US Energy Information Administration Based on Global Trade Information, Eurostat, Lloyds List Intelligence (APEX), Tradepress Most Current Data as of 12/2014

Iran Q3 2015 Investment Outlook

7

OECD Commercial Crude Oil Stocks 68 Forecast 66

OECD Crude Oil Stocks Days of Supply 64

62

60

58

56

54

The Organization for Economic Cooperation and Development includes 34 leading open market democratic nations.

52 Jan 2010

Jan 2011

Jan 2012

Jan 2013

Jan 2014

Jan 2015

Jan 2016

Note: Colored band around crude oil stocks days of supply represents the range between the minimum and maximum from Jan. 2010 - Dec. 2014. Source: EIA Short Term Energy Outlook 07‐2015

Energy Q3 2015 Investment Outlook

8

The Glut May Not End Soon World Liquid Fuel Production vs. Consumption

Currently Too Much Production

Source: EIA Short Term Energy Outlook July 2015 Energy Q3 2015 Investment Outlook

9

Possible Pressure on Prices Brent Crude Oil Futures About the Graph:

• Underlying Futures  Contract: ICE  (Intercontinental   Exchange)Brent Crude 

As of 7-15-15 Brent $57.04 WTI $51.28

• Roll Date: Roll on First  Day of Delivery Month  • Contract Size: 1,000  barrels • Deliverable Good: The  ICE Brent Crude futures  contract is a deliverable  contract based on EFP  delivery with an option  to cash settle

Source: Quandl 07‐15‐2015

Energy Q3 2015 Investment Outlook

10

Winner: Consumer Early Sign of Consumer Behavior: Food and Drink 51500

7.7% YOY  Growth

49500 47500 45500

5.3% YOY 

43500

Food and Beverage Sales

41500 39500

2015‐04‐01

2015‐01‐01

2014‐10‐01

2014‐07‐01

2014‐04‐01

2014‐01‐01

2013‐10‐01

2013‐07‐01

2013‐04‐01

2013‐01‐01

2012‐10‐01

2012‐07‐01

2012‐04‐01

2012‐01‐01

2011‐10‐01

2011‐07‐01

2011‐04‐01

2011‐01‐01

2010‐10‐01

2010‐07‐01

2010‐04‐01

2010‐01‐01

37500

Source: St. Louis Federal Reserve 07‐15‐2015

Energy Q3 2015 Investment Outlook

11

Loser: Leveraged Oil Companies Option Adjusted Spread (basis points) Energy High Yields have Narrowed but are still Wide

Source: Energy Information Administration 06‐30‐2015

Energy Q3 2015 Investment Outlook

12

Global Equity Returns QTR

YTD

1 year 3 years 5 years 10 years

S&P 500

0.28%

1.23%

7.42% 17.31% 17.34%

7.89%

MSCI EAFE Index

0.84%

5.88% ‐3.82% 12.45% 10.03%

5.60%

MSCI AC Europe

0.81%

4.36% ‐7.93% 12.14% 10.08%

5.42%

MSCI Japan

3.12% 13.79% 8.63% 13.56%

9.03%

4.39%

MSCI Emerging Markets

0.82%

3.12% ‐4.77% 4.08%

4.03%

8.46%

MSCI EM Latin America

3.61%

‐6.22% ‐23.19% ‐7.83%

‐4.14%

7.71%

Source: Informa Investment Solutions June 30, 2015 Capital Markets Review Q3 2015 Investment Outlook

13

S&P 500 Valuation

S&P 500 is Slightly Expensive Relative to Averages

But Very Cheap Relative to Bonds Source: Standard & Poor’s, JP Morgan Asset Management 06‐30‐2015 Capital Markets Review Q3 2015 Investment Outlook

14

S&P Revenues

Trade Weighted Dollar In the year-ago quarter (Q2 2014), one euro was equal to $1.37 dollars on average. For Q2 2015, one euro was equal to $1.11 dollars on average.

Strong Dollar Hurts Companies with Foreign Sales

Source: Richmond Fed, FACTSET, JP Morgan 06‐30‐2015

Capital Markets Review Q3 2015 Investment Outlook

15

Fixed Income Returns

Source: Morgan Stanley , S&P Preferred Stock, Citi US BIG Corporate Bond, Barclays Capital US Aggregate Bond, Citi US BIG Govt.  Sponsored Index; Citi Global Emerging Markets Sovereign Bond, Citi High Yield Market, Barclays High Yield Loans and Barclays  Global Convertibles June 30, 2015. 

Capital Markets Review Q3 2015 Investment Outlook

16

Uptick in Sovereign Yields Sovereign Yields  About the Graph: 4/14/15            7/18/15

Source: Federal Reserve Bank of Dallas, Bloomberg 7‐18‐2015

Britain

1.51

2.08

Germany

0.14

0.79

France

0.40

1.07

Italy

1.30

1.92

Spain

1.29

1.92

Netherlands

0.27

0.95

Portugal

1.76

2.61

Greece

11.60

10.78

Switzerland

‐0.18

0.03

1.89

2.35

U.S.

Capital Markets Review Q3 2015 Investment Outlook

17

Hedge Fund Returns QTR

YTD

1 year

3 years 5 years 10 years

HFRI Equity Hedge 

2.01%

4.05%

2.59%

8.44%

6.08%

4.90%

Distressed/Restructuring

‐0.18%

0.64%

‐5.89%

6.72%

5.65%

5.40%

Equity Market Neutral

0.59%

2.15%

3.54%

4.59%

3.16%

2.60%

HFRI Macro

‐3.58%

‐0.41%

4.11%

1.82%

1.85%

4.18%

HFRI ED: Merger Arbitrage

1.16%

3.30%

3.07%

3.80%

3.59%

4.90%

HFRI RV: Convertible  Arbitrage

1.44%

3.53%

1.64%

5.88%

5.30%

5.61%

Barclays Aggregate

‐1.68%

‐0.10%

1.86%

1.83%

3.35%

4.44%

S&P 500

0.28%

1.23%

7.42%

17.31% 17.34%

7.89%

Source: Informa Investment Solutions June 30, 2015 Capital Markets Review Q3 2015 Investment Outlook

18

Other Alternatives

QTR

YTD

1 year 3 years 5 years 10 years

Alerian MLP Index

‐6.09%

‐11.00% ‐19.81%

7.76%

11.53%

11.39%

Nareit Equity REITs

‐9.95%

‐5.67%

4.33%

8.93%

14.28%

7.01%

HFR CTA/Macro Index

‐4.60%

‐1.35%

4.58%

0.92%

‐0.69%

0.80%

Dow UBS Commodity

4.66%

‐1.56% ‐23.71% ‐8.76%

‐3.91%

‐2.62%

S&P 500

0.28%

1.23%

17.31% 17.34%

7.89%

7.42%

Source: Informa Investment Solutions June 30, 2015 Capital Markets Review Q3 2015 Investment Outlook

19

Commodities 4.5 4

Copper

3.5 3 2.5 2 1.5 1

Commodities Still in a Bear Market 1 Month

1 Year

Since April 2011

All Commodities

‐0.4%

‐14.4%

‐26.3%

Livestock

‐.8%

‐24.2%

‐18.5%

Foodstuffs

0.5%

‐16.9%

‐27.1%

Metals

‐3.3%

‐20.1%

‐34.6%

Source: Quandle, Commodity Research Bureau 06‐30‐2015

Capital Markets Review Q3 2015 Investment Outlook

20

Economic Outlook Purchasing Managers Index

Source: Dallas Fed 06‐30‐2015

Economic Outlook Q3 2015 Investment Outlook

21

Employment Record Job Openings

In spite of record job openings, positions go unfilled: Jobs require education & skill - 1 in 5 teens do not graduate. Corporate background checks - 1 in 12 adults are felons Source: Bureau of Labor Statistics 07‐2015

Economic Outlook Q3 2015 Investment Outlook

22

Employment

Current U3 Unemployment Rate: 5.3%

Job Openings Go Unfilled --- 22% of teens do not graduate High School. Source: Bureau of Labor Statistics 06‐2015

Economic Outlook Q3 2015 Investment Outlook

23

Housing

Household Formation Creates Demand for Homes

Demand has pushed home prices up 5.3% Year over Year Source: Morgan Stanley Global Investment Committee 06‐30‐2015

Economic Outlook Q3 2015 Investment Outlook

24

Housing Multi Family Housing Starts Thousands, 3 Month Average

Single Family Housing Starts Thousands, 3 Month Average

June Total Starts: 1,174,000

Source: Federal Reserve Bank 07‐15‐2015

Economic Outlook Q3 2015 Investment Outlook

25

Rail Traffic 

Intermodal Units (in thousands)

2015 2014 2013 2012

Slow 1st Q (Longshoreman Strike)

Strong 2nd Q

Week Source: Railfax 06‐30‐2015

Economic Outlook Q3 2015 Investment Outlook

26

Cars and Light Trucks About the Graph:

Pickups and SUVs Jump on lower Gasoline Prices

Source: Federal Reserve Bank of Richmond June 30, 2015 Economic Outlook Q3 2015 Investment Outlook

27

Recession Not Apparent Leon Cooperman’s Recession Check List

Source: Leon Cooperman, Omega Advisors SALT Conference May 2015

Economic Outlook Q3 2015 Investment Outlook

28

Potential Opportunities

1. Senior Loans 2. Mergers and Acquisitions 3. Dividend Yield 4. Euro Stocks

Potential Opportunities Q3 2015 Investment Outlook

29

1. Senior Loans

Source: KKR June 2015 Potential Opportunities Q3 2015 Investment Outlook

30

2. Mergers and Acquisitions U.S. Merger and Acquisition Volume

Source: Dealogic 06‐10‐2015 Potential Opportunities Q3 2015 Investment Outlook

31

3. Dividend Yield Tax  Tax Form Report K-1

1099

1099

Source: Morgan Stanley GIC 2015

Potential Opportunities Q3 2015 Investment Outlook

32

3. Dividend Yield: Infrastructure U.S. Natural Gas Consumption MM Cubic Feet  27,000,000

 26,000,000

 25,000,000

 24,000,000

 23,000,000

 22,000,000

 21,000,000

Source EIA 06‐30‐2015

Potential Opportunities Q3 2015 Investment Outlook

33

3. Dividend Yield: Infrastructure

Source: Alerian 06‐30‐2015

Potential Opportunities Q3 2015 Investment Outlook

34

3. Dividend Yield: Infrastructure 60% 40%

41%

2nd Quarter 2015 Energy Sector Earnings Forecast

20%

12%

7%

0% ‐20% ‐40% ‐50%

‐60%

‐55%

‐53%

Drilling

Equip. & Services

‐80%

MLP Pipeline, Storage and Refining

‐100% ‐120%

‐108% E. & P.

Coal

Integrated

Storage & Trans.

Refining

Source: FACTSET 7‐10‐2015 Potential Opportunities Q3 2015 Investment Outlook

35

3. Dividend Yield: Real Estate REIT Valuation

About the Graph:

REITS are at  highest valuation  (lowest Cap Rates)  since 2009 During 2013 Taper  Tantrum, Cap  Rates rose and  REIT prices fell

Cheap

Expensive

REITs currently yield about 4% ‐ near average  spread to  Treasuries – but  could be  vulnerable in a  rising rate  environment

Source: CBRE 06-30-2015

Potential Opportunities Q3 2015 Investment Outlook

36

3. Dividend Yield: Yieldco Yieldco Index

A Yieldco is a dividend growth-oriented public company, that bundles renewable and/or conventional long-term contracted operating assets in order to generate predictable cash flows.

Dividends may receive favorable tax treatment at the shareholder level if the returns are treated as return of the original investment. Source: Indxx 07‐16‐2015 and  NREL: A national laboratory of the U.S. Department of Energy

Potential Opportunities Q3 2015 Investment Outlook

37

4. Europe Euro Area Retail Sales YOY%

Euros (billions)

Net New Bank Loans to Euro-Area

New Loans: Households and Firms

Source: Eurostat, Alliance Bernstein  Data updated through May 2015

Potential Opportunities Q3 2015 Investment Outlook

38

4. Europe Why Europe Now? 1.

CAPE 30% Below U.S.

2.

Cheap Currency

3.

Lower Oil Prices

4.

QE “Whatever it Takes”

5.

Credit Expanding

6.

Retail Up

7.

Housing Up

8.

Technicals Up

Source: Morgan Stanley GIC 06‐30‐2015

Potential Opportunities Q3 2015 Investment Outlook

39

4. Europe Europe for Dividend and Growth?

About the Graph:

• Stocks are too  cheap or Bonds  in Europe are  too rich, or both • You earn  significantly  more on  dividends than  on bonds … plus  you may achieve  earnings growth  and dividend  growth • This is rare in  market history

Source Morgan Stanley GIC 6‐10‐2015

Potential Opportunities Q3 2015 Investment Outlook

40

Potential Opportunities Summary:

1. Senior Loans 2. Mergers and Acquisitions 3. Dividend Yield 4. Euro Stocks

For additional information on these strategies, email Abby at [email protected] Potential Opportunities Q3 2015 Investment Outlook

41

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