Olympian Capital Management, LLC

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APRIL MARKET OUTLOOKApril 2012

Olympian Capital Management, LLC

Overview

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There has been no net reduction in overall debt levels since the financial crises of 2007/08. Consumers have reduced debt levels but have been swamped by increases in government borrowings.

Worse, much of the debt has been purchased by the Federal Reserve and other global central banks which is resulting in unhealthy market distortions and an over reliance on central planning.

Amid the rise in debt, US public corporations have enjoyed record earnings which has been an overall positive for the economy.

However, the increase in corporate profits has been driven, in large part, by the increase in government borrowings.

The trend of government and central bank borrowing is unsustainable and therefore so is the level of profit growth experienced post 2009.

Key Portfolio Themes include a preference for large, global brand names selective mid cap high yield plays and an increase in investors downside protection while avoidance or hedging in Europe and certain key currencies and commodities would be prudent.

MARKET OUTLOOK

APRIL 2012

“CAN WE PAY THE PIPER”

Olympian Capital Management, LLC

OverviewRemarkably, since the financial crises of 2007/08, there has been no net reduction in overall debt levels in the US.

Total debt now exceeds $36 trillion, a figure which is almost 2.5x larger than the $ 15 trillion US economy.

The underlying stability of the economic structure has not improved since the financial crises and this has troubling implications for all investors going forward.

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Source: (SIFMA) Securities Industry and Financial Markets Association

Olympian Capital Management, LLC

Overview

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While households and financial businesses have reduced overall debt levels, their contribution has been swamped by the increase in government borrowings.

US government debt which totaled $4.5 trillion at the end of 2007 has increased to $9.9 trillion as at Dec 2011. An increase of 120%.

As the election cycle nears, markets will focus more intensely on this issues. Being better than Greece will not be a good enough answer by the fall.

Source: Federal Reserve

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Overview

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Worse still, much of debt has been ‘purchased’ by the Federal Reserve. Its balance sheet has increased from6% of US GDP to over 19% post the crises. A similar pattern can be observed in Europe, Japan andEngland. Central bank purchases of government treasuries, failing sovereigns and residential mortgagesleads to distortions and manipulations with true price discovery.

The Fed has replaced decentralized markets with Chinese like ‘central planning’causing distortions and interfering with true price discovery. Asset mispricing(overvalued assets) almost always leads to financial trouble.

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Corporate earnings have been a major beneficiary of increased government borrowings, the Fed’s zero interest rate policy and higher unemployment levels which have restrained wage demands.

S&P 500 earnings currently at $95 have surpassed their 2007 high.

Forward earnings, (see

graph) are forecast to reach $110 by year end.

Source: Factset Research

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Overview

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However, post 2007, the biggest contributor to corporate earnings growth has been the growth in government borrowing. (see red shaded area in graph).

In a normal environment, net investment (blue shade) and dividends (yellow shade) are the biggest contributors.

Corporate net investment has been dramatically absent this cycle. Lack of investment, further enhances profits as companies defer investments in plant, equipment and technology to a later date.

Olympian Capital Management, LLC

Overview

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Equity markets have followed earnings higher. Near term, a small pause or correction pause would be beneficial given that equities are up over 20% since late December and by more than 27% since late October.

However, longer term, this “not so virtuous cycle” of higher debt, unencumbered government borrowings, central bank intervention and higher profit growth is not sustainable.

The longer bank policy makers take to return to normal coupled with no legislative inaction, the harder the correction will be.

Source: Stock Charts

Olympian Capital Management, LLC

Overview

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Portfolio Themes and Perspectives:

As the structural imbalances continue to grow, so do market price distortions. Investors need to maintain portfolios that are more sophisticated and provide ‘enhanced’ active management, downside protection and intelligent hedging against tail risk extremes.

Currently, we are advising clients to consider large cap, global brand names with solid growth, dominant market share and clean balance sheets. In addition, with bank funding still restrictive, there are opportunities within selective mid cap names that offer high yields and reasonable balance sheets.

We see Europe’s slow to negative growth continuing and see it as a good place to hedge risk and offset US exposure on both the currency and equity side.

Emerging markets are mixed. We are being selective here, but turning more negative on the space.

Commodities are weakening with gold losing its luster and weakening to a degree not seen since 2008. Other key economic commodities look worse.