Winter Break Market Review &

Winter 2009 Market Outlook

James Cullen
Portfolio Manager
S&P 500 – Mid-November to Present
 We Are All Long Financials
• “We Are Well Capitalized, We Are Well
Capitalized… oh ----, uh, We Are Ready to
Work with the Government.”
• Bank of America (BAC, We Own)
Receives $20 Billion to Avert Bankruptcy
– Also Have Asset Guarantees on $118 Billion
– Ken Lewis: The Ultimate Dip Acquirer?
– Happy Trails, John Thain
 Thankfully, Stocks Stop At Zero*
• Govt. and Citigroup (C) Made Similar Deal
in November, Market Rallied Off News
– Not So This Time
• Is the Size of Problem Understood?
– Very Possible the Answer is Still “No”
– The Tier One Capital Ratio Myth
• Long-term Consequences for Large Banks
– Simply Put, Can We Afford a Citi or BoA?

*Even Though Some Are Worth Less

 Retail Comps for December
• Abercrombie (ticker: ANF), -24%
• American Eagle (AEO), -17%
• The Gap (GPS), -14%
• J. Crew (JCG), Mid-Teens Decline
• Urban Outfitters (URBN), -1%

• Negative Comps: “The Other Deleveraging”

– Who Expanded Too Aggressively in 2003-2007?
 Global Economic Data
• Japan
– December Exports at -35%
• Singapore
– Annualized GDP Contracted at -17%
– December Non-Oil Exports at -21%
• Taiwan
– December Exports at -42%
• Germany
– November Manufacturing Orders at -6%
 Going Back to Fall 2008…
• Fall Themes:
– Credit (Scarce and Expensive)
– Global Slowdown
• Expect More of the Same
– Debt Markets Remain Shut
– Economic Data Various Degrees of Awful

• A New Theme for 2009…

 Ben Bernanke, November 2002
• Because central banks conventionally conduct monetary policy by
manipulating the short-term nominal interest rate, some observers have
concluded that when that key rate stands at or near zero, the central
bank has “run out of ammunition” - that is, it no longer has the power
to expand aggregate demand and hence economic activity. It is true that
once the policy rate has been driven down to zero, a central bank can no
longer use its traditional means of stimulating aggregate demand and
thus will be operating in less familiar territory… However, a principal
message of my talk today is that a central bank whose accustomed
policy rate has been forced down to zero has most definitely not run
out of ammunition.
Like gold, U.S. dollars have value only to the extent that they are strictly
limited in supply. But the U.S. government has a technology, called a
printing press (or, today, its electronic equivalent), that allows it to
produce as many U.S. dollars as it wishes at essentially no cost. By
increasing the number of U.S. dollars in circulation, or even by credibly
threatening to do so, the U.S. government can also reduce the value of a
dollar in terms of goods and services, which is equivalent to raising the
prices in dollars of those goods and services. We conclude that, under
a paper-money system, a determined government can always
generate higher spending and hence positive inflation.
So Goes the Fed Balance Sheet
• September 7th, 2006
– $832.1 Billion in Federal Reserve Credit Out
• September 4th, 2008
– $894.8 Billion in Federal Reserve Credit Out
• October 2nd, 2008
– $1.4 Trillion in Federal Reserve Credit Out
• January 22nd, 2009
– $2.05 Trillion in Federal Reserve Credit Out
 Where to Look to Invest?
• “Slowly and carefully invest your cash reserves
into global equities, preferring high quality U.S.
blue chips and emerging market equities.”
– Jeremy Grantham, GMO Client Letter; Jan. 21, 2009
– Believes Long-Term Returns to be Good, But Stock
Market Has Not Bottomed

• Remember, ETFs Allow for Alternate Asset

Classes and Short Positions

GMO Source
 Positioning the Portfolio
• Will You Survive?
– Debt Maturities
– Asset Liquidity
– Government Support
• Then, Will You Profit?
– Long Term Industry Pricing Power
– Vulnerability to Currencies
– Vulnerability to Inflation
– Consistent Positive FCF
So, Was That The Bottom?