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Bens Barn

• How worried should I be?
• Is it really different this time?
• What actions should I take, if any?
• Thoughts from a long-time, long-term investor
• Tom McCandless 914-572-1887

Financial Planning Investments
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What are the Current Market Conditions Like?
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Unchartered Territory!
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Tonights Agenda

• Background of stock market
• Economics Key Linkages
• Individual Asset Classes
• Diversification
• Equity Investing
• Conclusions

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Timeline of US Stock Market

• 1685 Surveyors lay out Wall Street along the
  lines of the stockade (12 wall erected in 1653
  to protect Dutch settlers from British Indian
  attacks).
• 1792 First 5 securities are traded in NYC 3
  govt bonds and 2 bank stocks.
• 1792 Buttonwood Agreement 24 prominent
  merchants brokers agree to trade securities on
  a commission basis, marking the beginning of the
  NYSE.
• 1817 NY Brokers formally establish the NY Stock
  Exchange Board. (NYSEB)
• 1836 NYSEB prohibits its members from trading
  in the streets.
• 1857 Panic. Collapse of Ohio Life Insurance
  Trust. Prices fall 8-10 in a single session,
  culminating in 45 drop year-to-date.
• 1861 Civil War. Securities of seceding states
  suspended.
• 1863 NYSEB becomes NYSE.
• 1867 First stock ticker created.
• 1869 Watering Stocks prohibited (secretly
  issued shares) All shares must be registered.
• 1871 Continuous trading via Specialists begins.
• 1873 NYSE closes for 10 days due to collapse of
  Jay Cooke Co., a prestigious banking due to
  speculation in railroad stocks.
• 1892 NYSE establishes clearing house.
• 1895 Annual Reports, incl. income statements
  and balance sheets, required for all NYSE listed.
• 1896 WSJ publishes DJIA for first time. Value
  40.74, 12 stocks, incl American Cotton Oil and
  Standard Rope Twine.

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Timeline of US Stock Market Pt. 2

• 1907-- Panic of 07. Knickerbocker Trust rumors
  trigger massive run on NYC banks JP Morgan, Sr.
  infuses cash into banks.
• 1911 Blue Sky Law adopted by Kansas.
• 1913 Federal Reserve System created.
• 1914 WWI causes longest exchange shutdown ever
  at 4 ½ months.
• 1920 Centralized clearing system established.
• 1923 Fraud Bureau created start of historic
  Bull Market.
• 1929 Black Thursday (10/24/29). Stocks crash on
  record vol of 13m shares 5 days (Black Tuesday)
  later stocks fall by 11 on vol of 16m shares.
  Marks start of Great Depression.
• 1932 DJIA hits bottom, falling 89 for 1929
  Peak.
• 1933 Securities Act. Mandates registration
  disclosure requirements. FDR inaugurated. FDIC
  created under Glass-Steagall Act. US abandons
  Gold Standard US Dollar begins to float
  (managed)in FX markets.
• 1934 Securities Exchange Act. Creates SEC. FHA
  created.
• 1935 Social Security created, funded by FICA.
• 1943 Women begin working on the stock exchange
  floor.
• 1944 Bretton Woods Agreement. US Dollar begins
  to float freely in FX markets.
• 1945 Exchange closes for VJ Day.
• 1949 Beginning of longest Bull Market run in
  history (8 years).

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Timeline of US Stock Market Pt. 3

• 1954 DJIA surpasses its 1929 peak for the first
  time.
• 1959 NYSE adopts policy to discourage
  securities transactions between a listed company
  its officers / directors.
• 1963 JFK assassinated (11/22/63).
• 1966 Securities Investor Protection Corp.
  created.
• 1972 Securities Industry Automation Corp.
  formed.
• 1975 Fixed minimum commissions banned.
• 1982 First 100m share volume day for NYSE.
• 1987 Largest 1-day drop (10/19/87), DJIA
  falls 23.
• 1988 Circuit breaker introduced by SEC.
• 1995 3-day settlement period for stocks begins.
• 1997 Wireless data system trading in
  Sixteenths begins volume tops 1bn shares for
  NYSE.
• 1998 New circuit breaker rules, trading halts
  on drops of 10/20/30.
• 1999 DJIA Tops 10,000.
• 1999 Graham Leach Bliley Act. Repeals much of
  Glass-Steagall Act.

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Timeline of US Stock Market Pt.4

• 1999 Independent Directors required for NYSE
  Listed companies (min 3).
• 2000 Decimal pricing begins. First ETF.
• 2001 Terrorist attacks on WTC. NYSE closes for
  4 dayslongest since 1933. Reopened 9/17/01 on
  record vol of 2.37bn shares.
• 2002 Sarbanes Oxley Act enacted, aimed at
  improving accuracy reliability of disclosures.
• 2005 High bid for NYSE membership (seat) 4m.
  Seat sales end.
• 2006 NYSE goes public, merges with ArcaEx,
  owner of major ECN PacExch launches enhanced
  options and bond trading platforms.
• 2007 NYSE merges with Euronext NV, marking a
  major milestone for global financial markets
  opens office in Beijing, China.
• 2008 NYSE announces acquisition of Amex.

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Global Markets

• Stocks -
• Fixed Income -
• Commodities -
• Money Markets -
• Foreign Exchange -
• Derivatives -

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Global Markets Mega Trends

• Globalization
• Institutionalization
• Innovation
• Consolidation
• Communication

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Economics Key Linkages

• Monetary Policy control of money supply which
  influences short term interest rates only (Fed
  Funds)
• Fiscal Policy government borrowing (treasury
  issuance), spending taxation.
• Policies can be expansionary, neutral, or
  contractionary.
• Direct impact on aggregate demand or economic
  growth (GDP)

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Outstanding US Private Public Debt
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Gross Domestic Product

• Negative Growth in 09 Likely
• 2 Qtrs of Neg Growth Recession (BEA)

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Interest Rates Yield Curves

• Negative lending spreads of 06, 07 08 have
  recently turned sharply positivebut need
  should widen further.
• Yield curve changes appear surprisingly normal
  similar to prior business cycles.
• NBER will likely determine in 2H09 that nation
  entered recession beginning in 4Q08 lasting at
  least 2 more quarters.

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Retail Sales

• Falloff in sales unprecedented?

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Building Permits

• Severe Correction Worse than Normal?

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Employment Growth

• More downside likely

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Individual Asset Classes

• Though most people have either direct or indirect
  ownership in stocks, it is often not their
  largest personal asset.
• Assets include primary residence, bank accounts,
  life insurance cash values, annuity surrender
  values, collectibles, jewelry/art, brokerage
  accounts, retirement accounts (401-ks, IRAs,
  private equity, etc.), college savings fund,
  business ownership.

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Individual Debt Classes

• Home Mortgage(s)
• Auto / Card / Student Loans
• HELOC
• Back Taxes
• Investment-related debt
• Business borrowings

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Cash

• Emergency Savings enough to fund your familys
  living expenses for at least 2 years.
• Sources of liquidity most bank accounts, paid
  up life insurance, securities in brokerage
  accounts, saleable collectibles.

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How much of my total assets should be in stocks?

• Depends on many items, including some rough
  calculation of your net worth (assets minus
  debts).
• Risk Tolerance How much can you stand to lose?
• Old, old rule of thumb gt 100 current age
  of overall assets in equities.

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Diversification

• Perhaps the most important rule of all!
• Across and within asset classes.
• Allocation determining how big each asset class
  should be.
• Correlation Key to diversification as most
  financial assets are positively correlated
  Precious metals vs. stocks bonds.

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Age-Based Diversification

• A person in their 40s should have
• 5065 Domestic / International Stocks
• 1525 Domestic / International Bonds
• 2535 Alternative Invests (REITs, TIPs, Private
  Equity, Venture Cap Funds, LPs)
• 510 Cash Equivalents
• (for all financial assets)

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Age-Based Diversification

• A person in their 50s should have
• 4560 Domestic / International Stocks
• 2030 Domestic / International Bonds
• 2030 Alternative Invest (REITs, TIPs, Private
  Equity, Venture Cap Funds, LPs)
• 510 Cash Equivalents
• (for all financial assets)

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Age-Based Diversification

• A person in their 60s should have
• 3560 Domestic / International Stocks
• 2540 Domestic / International Bonds
• 2030 Alternative Invest (REITs, TIPs, Private
  Equity, Venture Cap Funds, LPs)
• 1015 Cash Equivalents
• (for all financial assets)

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Equity Investing

• Two primary schools of equity analysis
  technical analysis and fundamental analysis.
  Both combine art and science.
• Technical Analysis Analyzing price volume
  movement in stock price charts for specific
  patterns. Frequently used by traders.
• Fundamental Analysis Analyzing business
  prospects, profitability, financial strength,
  competitive positioning, management capabilities
  including projections of financial statements
  and the use of a variety of mathematical equity
  valuation models to determine a stocks intrinsic
  value.

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Technical Analysis

• Detecting chart patterns to signal buy, sell or
  hold recommendations for equities.
• Common chart pattern terms breakout, confirmed
  upturn, confirmed downturn, head shoulders, cup
  handle, double bottom, double top.

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Technical AnalysisDouble Bottom?

• 1 of 5 key basing chart patterns.
• Base Length 7 weeks to 15 months.
• Buy point occurs as stock price surpass middle of
  the W as it is coming up from its 2nd bottom.
  Volume should increase.

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Fundamental Analysis

• Key Definitions to know
• 1) Earnings Per Share or EPS
• Last 12 months? Current Quarter annualized?
  Estimated next 4 quarters?
• 2) Price / EPS, or P/E ratio. A measure of
  affordability. Impacted by EPS growth rates,
  management competency, industry dynamics.
  Consistent EPS growth Higher P/E vice versa.
  Key driver to Executive compensation.
• 3) PEG. P/E-to-Growth (EPS). Look for a ratio
  lt 1.0.
• 4) Market Cap Current stock price x outstanding
  common shares.
• 5) Return on Equity Net Income / Shareholders
  Equitya key measure of profitability that can be
  broken down into other supporting financial
  ratios.

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EPS P/E Valuation Dynamics RIMMWhy EPS
Matter So Much!

• RIMM (42.50--down 70 from 148 in June)
• (March 1 Fiscal)
• LTM EPS 3.07 P/E 13.8x
• Current Qtr x 4 3.48 P/E 12.2x
• Est next 4 Qtrs (avg) 3.55 P/E 12.0x
• Year Ago EPS 2.26
• Estd EPS of 3.55 (57 yr/yr sustainable?)
• Latest Qtr-to-Qtr EPS Growth 18
• PEG 0.67

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EPS P/E Dynamics RIMM - Pt 2

• If RIMM beats current qtr EPS est of 0.91 by
  0.04, then 3.55 EPS est likely increases to
  3.65, then EPS is growing at 62 yr/yr 37
  qtr/qtr (accelerated).
• Current P/E of 12.0x would represent a PEG of
  0.32 could expand quickly to 1313.5x P/E.
• Price would likely pop to 47--50.

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EPS P/E Dynamics RIMM - Pt 3

• If RIMM misses current qtr EPS est of 0.91 by
  0.04, then 3.55 EPS est likely decreases to
  3.45, then EPS is growing at 52 yr/yr 5
  qtr/qtr (decelerated).
• Current P/E of 12.0x would represent a PEG of 2.4
  could collapse quickly to 1111.5x P/E.
• Price would likely drop to 38--41.

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Volatility

• All time high 60 higher than prior spikes.

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DJIA Price Wtd

• Prices Collapse Unprecedented?

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SP 500 Market Cap Wtd

• Recent Selloff Dramatic Unprecedented?

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SP 500 Sector Breakdown134 Industries / 500
Companies

• Info Technology 16.0 (15 Industries)
• Financials 15.9 (20)
• Energy 13.4 (7)
• Health Care 13.1 (10)
• Consumer Staples 12.2 (13)
• Industrials 11.1 (18)
• Consumer Discretionary 8.5 (33)
• Utilities 3.6 (4)
• Materials 3.4 (13)
• Telecom Services 3.05 (2)

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Cyclical Trends Leading Indicators for
Commercial Banks
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Banking Sector Valuations
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PNC Bank Valuation
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Conclusions

• Take the long-term view when investing in the
  stock market. Discounts growth by about 6--9
  months.
• Diversify all personal assets by different asset
  categories real estate, stocks, bonds, cash,
  etc.
• Diversify all assets within each asset category
  For stocks see SP Sectors.
• Current Stock Market appears priced at an
  attractive entry point by historic standards for
  long-term investors. More downside is possible.
• The stock market continues to be dominated by mob
  psychology (Behavioral Finance) reinforced
  hourly through various media outlets.

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Conclusions Pt 2.

• Investment Environment Positives
• Excessive valuations have corrected dramatically
• Earnings expectations deflated
• Common share buybacks increasing
• Proactively managing costs better
• Interest rates are low
• Unprecedented liquidity financial backstop
  measures by Federal Reserve, US Treasury, FDIC
• Many economic measures are near 7475 levels,
  commonly regarded as rock bottom.

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Financial Stock Positives

• Institutions have clearly purged holdings.
• Financial stock only Hedge Funds have collapsed.
• Ongoing discussion to adjust the massive current
  negative mark-to-market accounting hits to
  earnings. Future markups possible?
• A steeper yield curve is often a precursor (69
  months) to a rebound in the bank stocks.
• Financial stocks tend to lead the overall market
  direction (up down) and are regarded as early
  cycle stocks.

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Other Advice Pt 1

• Know your pain (loss) threshold!!
• Avoid first hour of trading (930am open)
• Avoid 12 noon2pm very thin trading
• Trading during last hour (34pm) can greatly
  influence the next days direction.
• Seasonality selling in Oct and Dec buying in
  January. August can be erratic due to vacations.

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Other Advice Pt 2

• During a recession or near quarter-end, companies
  tend to announce bad news after 4pm on Fridays.
• Market does not differentiate during a bear
  market good companies get hit just as hard as
  bad companies.
• Market never tolerates a slowing rate of EPS
  growth, especially if P/E is high DELL, MSFT,
  WMT SBUX.
• Always enter a stop loss when buying stocks,
  typically about 10 (max loss).

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Other Advice Pt 3

• For mutual fund investors
• Try to avoid actively managed funds with 50bn
  in Assets Under Mgmt. Too big to outperform.
• Morningstar and Forbes publish rankings for funds
  that do well in BOTH bear bull markets.
• More mutual funds than stocks.
• Since most mutual fund portfolio managers
  struggle to outperform the SP 500, the timing of
  your purchase of the fund (when the market is
  low) becomes even more important. Timing is
  Everything!
• Otherwise, one can invest in a broad variety of
  funds that mimic the broad market indices.

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Best Seats on a Train Wreck Long-Term Large Cap
Buys

• Financials NTRS, BAC, PNC
• Energy CVX, RIG, BP
• Health Care JNJ, PG, MRK, BMY, SYK
• Consumer Staples COST, MO, ADM, SWY, WAG
• Industrials GE, DOW, UNP, BA
• Technology AAPL, RIMM, HPQ, CSCO, ADP
• Consumer Discretionary NKE, DLB, TIF, COH

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Summary

• Diversify your assets.
• When investing long-term in the stock market a)
  know your pain threshold
• b) Timing your entry is THE most important
  investment decision.
• At the earliest, the stock market may not be
  poised for a sustained upturn until 1Q09above
  norm volatility will continue.