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SEATTLE | 206.622.3700 LOS ANGELES | 310.297.1777 www.wurts.com
10am PST
January 28, 2014
QUARTERLY RESEARCH CONFERENCE CALL
December 2013 Quarterly Research Conference Call
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Introduction by: Jeffrey MacLean, Chief Executive Officer
Presented by: Scott Day, CFA, Managing Director Capital MarketsIan Toner, CFA, Director of Strategic Research
Jeffrey J. MacLeanCEO
Scott Day, CFAManaging Director
Capital Markets
Ian Toner, CFADirector of
Strategic Research
2
A N U P D A T E F R O M W U R T S & A S S O C I A T E S
3
2014 marks our 29th year serving institutional investors and the firm continues to grow.The firm has reinvested this growth back into additional personnel and resources devotedto better serving our clients.
The firm currently advises on over $74 Billion in client assets and we continue to rankamong the top consulting firms in the United States with regard to service quality,according to the Greenwich Associates Annual Consultant Survey.
Last year, we added new outsourced CIO (“OCIO”) client relationships, which now placesus 16th in worldwide OCIO assets under advisement, according to the most recentPensions & Investments survey.
Our clients continue to benefit from our increasing expertise in understanding the variousrisks within their portfolios. We now provide risk monitoring and analysis services on astandalone basis using Barra Analytics.
Wurts & Associates remains 100% employee‐owned and recently added Jeffrey Scott,Chief Investment Officer, as our newest shareholder.
We appreciate the opportunity to serve our clients and we look forward to an exciting2014.
M A Y Y O U L I V E I N I N T E R E S T I N G T I M E S
4
‐40%
‐30%
‐20%
‐10%
0%
10%
20%
30%
40%
S&P 500 MSCI EAFE MSCI EM IntermediateGov't
US High Yield EM Bonds Gold
2013 Total Returns
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
S&P 500 MSCI EAFE MSCI EM IntermediateGov't
US High Yield EM Bonds Gold
2013 Historical Percentile Rank
‐80%‐60%‐40%‐20%0%20%40%60%80%100%120%140%
S&P 500 MSCI EAFE MSCI EM IntermediateGov't
US High Yield JP EMBI Gold
2013 Return Median Return
Top 10%
Bottom 10%
Since Inception Historical Returns
Source: MPI, Bloomberg, Wurts
Source: MPI, Bloomberg, Wurts Source: MPI, Bloomberg, Wurts
A L L A B O U T T H E P A N D N O T T H E E
5
Trailing 12-Month Growth
0
5
10
15
20
25
05101520253035404550
1978 1983 1988 1993 1998 2003 2008 2013
Russell 2000 Regular P/E
S&P 500 Shiller P/E
S&P 500 Shiller P/E (Left) Russelll 2000 Regular P/E (Right)0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Return P/E Growth Operating Earnings Growth
S&P 500 Russell 2000
‐20%
‐10%
0%
10%
20%
30%
40%
50%
Return P/E Growth Operating EarningsGrowth
S&P 500 Russell 2000
2013 Historical Percentile Rank Historical P/E Ratio
Source: MPI, S&P, Bloomberg, Wurts
Source: S&P, Bloomberg,, WurtsSource: MPI, S&P, Bloomberg, Wurts
I N V E S T I N G D E A L S I N P R O B A B I L I T I E S , N O T C E R T A I N T Y
6
Bulls ‐ Bears % of Time 5 Weeks 10 Weeks 20 Weeks 52 Weeks< ‐20% 7% 0% 1% 3% 16%
‐20 to ‐10% 7% 1% 2% 3% 14%‐10 to 0% 10% 1% 2% 4% 12%0 to 10% 17% 2% 3% 5% 11%10 to 20% 20% 1% 2% 3% 7%20 to 30% 19% 1% 1% 2% 5%30 to 40% 14% 0% 1% 2% 6%>40% 6% 0% 0% 1% 2%
Investor Intelligence Bulls ‐ Bears Subsequent S&P 500 Returns
Investors Intelligence Sentiment Index
Investor Intelligence Level and S&P 500 ReturnsNAAIM Survey of Active Manager Sentiment
Source: Investors Intelligence
Source: Investors IntelligenceSource: National Association of Active Investment Managers
R E A L L Y – W E ’ R E B A C K H E R E A G A I N ?
7
$‐
$20
$40
$60
$80
$100
$120
$140
$160
$180
$200
1997 1999 2001 2003 2005 2007 2009 2011 2013
$‐
$50
$100
$150
$200
$250
$300
$350
$400
1999 2001 2003 2005 2007 2009 2011 2013
Covenant-Lite Loan Issuance ($Billions)
High Yield Underwriting Volume ($ Billions) NYSE Margin Debt vs S&P 500
Margin debt is up 100 times over the past 39 years
Source: Bloomberg, Wurts
Source: Bloomberg, Wurts Source: NYSE, S&P, Bloomberg, Wurts
T H E B E R N A N K E W A S I N C O N T R O L
8
600
1100
1600
2100
2600
3100
3600
4100
500
700
900
1100
1300
1500
1700
2008 2009 2010 2011 2012 2013
Fed Ba
lance Sheet
S&P 50
0
S&P 500 Fed Balance Sheet
QE 1‐9%
QE 1 Expanded
50%
QE 223%
Operation Twist19%
QE Infinity32%
‐16% ‐17%‐6%
Correlation = 94%
$0
$10
$20
$30
$40
$50
$60
$70
$80
Jan‐14 Mar‐14 May‐14 Jul‐14 Sep‐14 Nov‐14No MeetingMeeting
Projected 2014 QE (Billions)
Source: S&P, Federal Reserve, Bloomberg, Wurts
Source: Hank BlausteinSource: Bloomberg, Wurts
The S&P 500 and The Fed
T H E T R O U B L E W I T H T R A N S I T I O N
9
Hope of “transition”
Recognition of reality
‐20%
‐15%
‐10%
‐5%
0%
5%
10%
15%
1 11 21 31 41 51 61 71 81 91 101 111 121 131 141
Total R
eturn
Trading DaysEnd Of QE 1 End of QE 2 End of QE 3 Traditional Policy: Avg After Tightening
Source: S&P, Federal Reserve, Bloomberg, Wurts
S&P Total Return After Fed Tightening
Q E L O S T I N T R A N S L A T I O N
10
Sources: BLS, Federal Reserve, Bloomberg, Wurts
Sources: BEA, Bloomberg, Wurts
Sources: BLS, Federal Reserve, Bloomberg, Wurts
GDP
Labor Market Inflation
M I S S I N G T H E M A R K
11
Sources: Federal Reserve, Bloomberg, Wurts
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
2010 2011 2012 2013 2014
Actual
Most Recent Fed Forecast
1.2
1.4
1.6
1.8
2.0
2.2
2.4
2.6
2.8
3.0
3.2
Aug‐11 Nov‐11 Feb‐12 May‐12 Aug‐12 Nov‐12 Feb‐13 May‐13
Real GDP An
nualized
(%)
Actual
1.0
1.5
2.0
2.5
3.0
Nov‐11 Feb‐12 May‐12 Aug‐12 Nov‐12 Feb‐13 May‐13 Aug‐13
Real GDP An
nualized
(%)
Sources: BEA, Bloomberg, Wurts Sources: BEA, Bloomberg, Wurts
Actual
Q2 2013 Real GDP ForecastQ1 2013 Real GDP Forecast
Fed Real GDP Forecast vs Actual
R E A C H I N G E S C A P E V E L O C I T Y
12
EBITDA and Nominal GDP YoY Growth
Source: S&P, Bloomberg, Wurts
Source: S&P, Bloomberg, Wurts
Source: S&P, Bloomberg, Wurts
‐70%
‐60%
‐50%
‐40%
‐30%
‐20%
‐10%
0%
10%
20%
30%
2007 2008 2009 2010 2011 2012 2013
Forecast earnings are persistently higher than actual earnings.
‐5%
‐3%
‐1%
1%
3%
5%
7%
9%
‐30%‐25%‐20%‐15%‐10%‐5%0%5%10%15%20%25%
1990 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013
Growth in EBITDA (Left) Nominal GDP YoY (Right)
S&P 500 Operating Earnings Forecast Error Rate
60
80
100
120
140
160
180
2006 2007 2008 2009 2010 2011 2012 2013 2014
Trailing 12 Months Operating Earnings Estimate 12 Month Operating Earnings
S&P 500 Operating Earnings
A H I T C H I N T H E ‘ G I D D Y U P
13
0.5%
1.5%
2.5%
3.5%
4.5%94
95
96
97
98
99
100
101
102
2010 2011 2012 2013 2014SMR Duration Survey (Left) 10 Year Rates (Right)
6.8%
9.2%
0.9%
0.7%
0.5%0.3%
6.0%
6.5%
7.0%
7.5%
8.0%
8.5%
9.0%
9.5%
1995 ‐ 2004 Net Margin Lower Interest Expense Lower Energy Cost
(21%) (12%)
SMR Duration Survey & 10 Year Rates
(38%)
(29%)
Source: CSFB, S&P, Bloomberg, Wurts
Source: S&P, US Treasury, Bloomberg, Wurts Source: Stone & McCarthy, US Treasury, Bloomberg, Wurts
Contribution to Increase in S&P 500 Net Margin
S&P 500 & Rates
H A P P Y B I R T H D A Y F E D
14
$0.0
$0.5
$1.0
$1.5
$2.0
$2.5
$3.0
1984 1988 1992 1996 2000 2004 2008 2012
Trillions
Required Reserves Total Reserves
$0
$1
$2
$3
$4
$5
$6
0%
2%
4%
6%
8%
10%
12%
1984 1988 1992 1996 2000 2004 2008 2012
Interest Paymen
t (Millions)
Interest Rate (Fed
Fun
ds)
Interest Payment (Right) Interest Rate (Left)
Fed Required and Total Bank Reserves
Interest Paid on Excess Reserves
0%
20%
40%
60%
80%
100%
Current 1% 2% 3% 4% 5%
Interest Paid Interest Earned
Interest Paid vs Interest Earned
Source: Federal Reserve, Bloomberg, Wurts
Source: Federal Reserve, Bloomberg, WurtsSource: Federal Reserve, Bloomberg, Wurts
H A P P Y B I R T H D A Y F E D
15
Source: Federal Reserve, Bloomberg, Wurts
Source: Federal Reserve, Bloomberg, Wurts
10
20
30
40
50
60
70
80
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
16%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
2014 2015 2016 Long RunFed Weighted Average Projection Market Expectation
Fed Projected Funds Rate
Fed Balance Sheet Leverage A Bottom in Rates?
Source: Bloomberg, Wurts
W H Y T A P E R N O W ?
16
Sources: S&P, Bloomberg, Wurts
The Data Dependency Camp
The Financial Stability Camp
Source: BEA, BLS, Bloomberg, Wurts
E U R O P E : D O W N , B U T N O T O U T
17
Sources: Eurostat, Organization for Economic Cooperation & Development, Bloomberg, WurtsSources: ECB, Eurostat, Bloomberg, Wurts
Sources: Eurostat, Bloomberg, Wurts
“whatever it takes”
‐10% ‐8% ‐6% ‐4% ‐2% 0% 2%
Greece
Spain
Portugal
Italy
France
Germany
EurozoneDomestic Demand GDP
Real GDP & Domestic DemandECB Balance Sheet & Money Supply Growth
Growing Economic Concerns
J A P A N : H O W I S T H E E X P E R I M E N T G O I N G ?
18
GDP
Sources: Bank of Japan, TSE, Bloomberg, WurtsSources: Economic & Social Research Institute of Japan, Bloomberg, Wurts
Sources: Ministry of Internal Affairs & Communication, Bloomberg, Wurts
Inflation
Capital Markets
E M : O P P O R T U N I T Y O R W I L L T H E C H E A P G E T C H E A P E R ?
19
Sources: MSCI, S&P, Bloomberg, WurtsSources: Banco Central do Brazil, People’s Bank of China, Central Bank of Russia, Bloomberg, Wurts
Sources: IBGE, Bloomberg, Wurts
‐60%
‐40%
‐20%
0%
20%
40%
60%
80%
100%
‐50%
0%
50%
100%
150%
200%
2009 2010 2011 2012 2013
Total R
eturn Differen
ce
Total R
eturn Since 20
09
Difference (Right) S&P 500 (Left) MSCI EM (Left)
Equity Total Return Comparison
Average GDP
Central Bank Policy
Economic Overview
G L O B A L E C O N O M I C S U M M A R Y
Summary: Global economic growth trend remains slow and low with some recent improvement in EAFE. The underlying strength of theeconomies remains historically weak.
U.S.: Not much change over the past 6 months. Growth trends remain slightly positive, but historically weak. EAFE: A nice recovery over the past 6 months and both the trend and underlying strength improved. EM: A slight improvement in trend growth, but the underlying economies remain historically weak. Canada: Remains historically weak and trending lower.
Outlook (Next 3-6 Months): Look for U.S. growth to remain slow (with the risk of GDP slipping toward 1%). EAFE growth trend looks good andcould surprise on the upside toward 1%, while EM growth trends are likely to remain weak unless the central banks begin to provide stimulus.
21
US
EAFE
EM
Canada
Slowing Growth
Expanding Growth
Strong
Weak
*Large box is current, small box is six months ago
G L O B A L E Q U I T Y S U M M A R Y
Summary:While the U.S. is mostly unchanged, both EAFE and EM have experienced broad changes over the past 6 months. U.S.: The trend remains slightly bullish, but historically rich. EAFE: The trend remains slightly bullish and the economic improvements have moved the valuation from slightly rich to neutral. EM: A moderate change in trend from neutral toward slightly bullish. The poor performance pushed valuations from rich to cheap. Canada: Similar to EM with a moderate change in trend from neutral to slightly bullish, while valuations remain rich.
Outlook (Next 3-6 Months): While the general equity market trend remains slightly bullish to neutral, valuations remain neutral to historicallyrich. We need to respect both the slightly bullish trend as well as the rich valuations. Thereby, our outlook for equities remains neutral until we see thetrend move from neutral to bearish.
22
US
EAFE EM
Canada Lower Equities
Higher Equities
Cheap
Rich
* Large box is current and small box is six months ago
G L O B A L R A T E S S U M M A R Y
Summary:With the historic rise in global interest rates, the bearish downtrend remains strong (higher rates); however, valuations havemoved from historically rich toward cheap (except for EAFE).
U.S., EM, Canada: The trend remains firmly bearish (higher rates), but the sharp move higher in rates has improved valuations from rich tocheap.
EAFE: The trend toward higher rates continues, and with the move, valuations are neutral.
Outlook (Next 3-6 Months):We expected rates to move lower to correct for the cheap valuations. U.S. rates rallied 60 bps, but then rose onceagain. The valuations have yet to correct and we expect to see rates move lower once again, possibly below the prior 2.4% low in US 10‐year yields.
23
US
EAFE
EM
Canada
Higher Rates
Lower Rates
Cheap
Rich
* Large box is current and small box is six months ago
C R E D I T S U M M A R Y
Summary: The move toward wider credit spreads has been slow with the overall trend in credit being fairly flat. Investment Grade (IG): While valuations have remained unchanged, the trend has moved from slightly bullish (tighter spreads)/neutral to
slightly bearish (wider spreads). High Yield (HY): Similar to IG, the valuation has not significantly changed, but the trend has slowed by moving from slightly bullish toward
neutral. EM:Much like equities, the most significant move was in EM debt. The trend has moved slightly, but valuations moved from rich to neutral.
Outlook (Next 3-6 Months): Look for spreads to continue to press wider with the potential for an increase in the speed of the spread wideningas the equity market correction grows deeper. Expect to see HY join IG and EM in the trend toward wider spreads.
24
US IG US HY
EM (USD)
Wider Spreads
Tighter Spreads
Cheap
Rich
* Large box is current and small box is six months ago
C A P I T A L M A R K E T S U M M A R Y
25
Global equities trend remains slightly bullish EAFE currently offers the best relative value while the S&P/TSX offers the least value. S&P 500 trend remains slightly bullish, but valuations are historically rich.
The trend in the global interest rates remains bearish (expecting higher rates) The move toward higher rates since July 2012 has been one of the worst in history and changed the valuation from rich toward
neutral, with the exception of EAFE rates.
Credit Spreads remain neutral in trend but rich in valuation With record issuance in High Yield and a dramatic return of covenant light loans, credit remains a focus for investors though spreads
have shown little change over the past several quarters.
C A P I T A L M A R K E T S U M M A R Y
S&P 500
MSCI EAFE
S&P/TSX
MSCI EM
US Rates
EAFE Rates
Canada Rates
EM Rates
IG Credit
HY Credit
EM Credit (USD)Commodity
‐100%
‐80%
‐60%
‐40%
‐20%
0%
20%
40%
60%
80%
100%
‐100% ‐80% ‐60% ‐40% ‐20% 0% 20% 40% 60% 80% 100%
Bullish Trend
Cheap
RichBearish Trend