Q3 SCM Meeting

These all have major NEGATIVE impacts on capital markets – 1. Increased Regulation, 2. Deleveraging, 3. Move from Free Market to Socialistic European Society, 4. More Conservative Consumer

http://www.nytimes.com/interactive/2008/10/11/business/20081011_BEAR_MARKETS.html

This is a really scary market – most likely a big downturn – and important to stay out until for sure positive. Better to be a little late to the party coming up and catch 80% of the upside than get in too early and get hurt significantly.

2009 eatimate 101.90
2008 estimate 1100.00 75.94
2007 Core prelim 1468.36 82.54

Idea that the P/E multiples on the S&P right now are TOO HIGH. $946 of the S&P still might have ~30% to come down – depending on what the 1. true multiple these companies are going to be bought at and 2. What the actual earnings come in at. Look for Analyst to write down as the market goes down – not the other way around. If earnings fall to anywhere around 2003 levels of $40-60 a share, and multiples come back down, we still have significant opportunity for the S&P ending in that $500-800 range – that is scary.

’08 Will be lower than expected – but there is only really 1 bad earnings Q priced in. ’09 will have 4 bad quarters. Financials will have $0 earnings, Gas and Consumers are both big parts of the S&P as well – Oil prices are dropping and the Consumer will take on the attitude “cool to be thrifty.”
Oil Idea – Saudi’s will open the spigots – Oil down to $50 a barrel, make our energy independence much more difficult, PE and VC funds were unwilling to fund Green even when Oil was at $90 a barrel. Russia will continue to be hurt – 40% of their market is oil.

*Note on GOOG – despite my and market analysts feelings of where it should be ($600-800), it is now TOO big to sustain the large growth rate. Advertising will be crushed when companies cut back on spending. They may have 80% of the market, but remember analysts like JDSU at $90, 60, 30, 5; like YAHOO at $75, 40, 20…; the only reason Apple was able to make that big run was because they reinvented themselves – also opened individual Apple Stores which changed the way they distributed.

On an even more depressing note – if you bought a 10 year bond in 2000, your returns would be 1. Positive, and 2. 7-10% higher what equities have returned since then

Brazil is shut down as an economy for the next 2 years

China will go from 11% GDP to 8% - tied to us, if we don’t consume there, they are in big trouble

Obama will win the election – sectors hurt from this – Healthcare, Consumer
With his taxes – small business taxes go from 40-60%, $250k+ earners move from 40%-50%. Upper mid class and upper class are where gov’t makes the most of its tax income. After getting taxed in ’09 -> vote in Republican congress (just like when Clinton was in office) -> Gridlock -> nothing will get accomplished => where that leaves us: more taxes without anything to show for it

What are the companies looking to benefit if we start developing Nuclear power?

Look for companies to lower guidance for EST in Q4 and beyond – also report early

Estimates for bad loans are understated -> recession will continue to make more bad loans (negative feedback loop)

Financials will be heavily regulated – gone are the days of old/days of super leverage -> back to the 50s where leverage is considered bad/dangerous -> housing prices come down -> financials will hide earnings forever an sell for 9x earnings

Real Estate opportunities -> people that can afford to buy land/rental property without taking financing can pick up a lot of good potential real assets

Strongest Sectors to be in: Consumer Staples, Pharma, CASH

Some quick money opportunities (for Christmas money):
C – 4 times has hit 52 week lows -> proceeded by 50% pop in the stock
Genentech – look for this deal to close by the end of the deal – should get the price they are asking for as well

For the next 2+ years we could be in a very volatile and sideways market. During that time it is a great stock picker market. Look for great selection of companies in the best position to create new markets or take new market share depending on what rules and regulations are imposed.

Previous Q2 Meeting Notes

Patrick -least confident in last year
For next 3,6,9 months
Ass handed to him in April -
Bearish last year -getting clients out of equities and into treasuries
Now -Jan/Feb/March -not as bullish on Treasuries -but kept cash there
April -S&P 500 is up over 7%
10 Year Treasury -3.92% -
Sue Q's -"would you rather be a little late to a big party" or "would you rather be early to no party"
Leading Market indicators to becoming more bullish -
Blackrock and other Hedge Funds -buying subordinated debt -set up a control to buy the debt off of some of the bigger banks books at $0.60 on the $1.00.
1.
Treasury selling off -but might not be going into the equities -Sue -bounce in April might be linked to the huge statement for coming in on Bear Stearns -securities firm -"if the FED is going to hold up Bear Stearns, says to world not going to be 1930s depression", Papa -shows once again -"US Gov is the lender of last resort"
2.
REITs -US Equity YTD doing well also Homebuilders, 12M negative; financials took a big hit in Jan, but great returns since then
3.
Bearish Case
Export to 1st world countries
1)
Start spending in their own country
2)
Jan -this market negativity caught by the rest of the world -yes
3)
Commodity driven countries -
4)
Decoupling idea -China is dependent on selling to us -but their currency is pegged to the dollar -which allows them to be price competitive
5)
Patrick's response -emerging markets need to catch up
i.
Oil Producing Countries -overshoot fundamentals -$ got really strong in '87 -
a)
Does the Dollar stay weak -against which currencies -and why?
1)
Sue's Q's -
ii.
Sue -China -GDP -10% -does the Olympics and etc -make it a better place to invest in, industrial production 17.8%, US is 1.6%
a.
Long-term thoughts on weakness of the consumer, broadly -the weak US economy will hurt the world Equities
1.
Investment Meeting 5/6/08
Tuesday, May 06, 2008
3:07 PM
Unfiled Notes Page 1
Oil Producing Countries -overshoot fundamentals -$ got really strong in '87 -OECD came together and brought it down, 2005 -$ rallied b/c Fed raised rates; thoughts on raising rates Jan '09 -eventually macro works it's course = bullish on the $, bearish on oil -S/D ratio on oil -hasn't changed from $100-120. Changing is the premium
a)
Strong IP Growth
b)
Does the raising of rates hurt or help the market?
a)
Can Interest Rates go much lower?
2)
Oil market -less confident about the Oil market -$120 a share -when will the consumer stop spending?
3)
Pull us out of Iraq -stabilize the country -Oil goes to $200 a barrel
a)
Real negatives of dems -focus on america not globalization
i)
Positive -strengthen dollar -all the money to the war now is able to pay down debt and do whatever we want
ii)
McCain -wants to kick Russia out of the G8 -we need Russia if Oil goes that high
b)
Anti-Nafta
c)
Democratic president -what happens then?
4)
not printing money like Greenspan
One.
Bailing banks out
Two.
Making the consumer take it on the chin
Three.
Lenders are pulling more lines of credit than you know -really starting affect more and more people
Four.
Fed now
i)
Financial institutions big percentage
One.
Tech spending is lower than ever
ii)
Double-digit interest rates, Fed fights inflation -9%, raising rates aggressively to fight inflation -2008 inflation rate 3.3%
a)
1987-1988 get back from a cash position and into equities
One.
Sell on fundamentals and I buy on Technicals
i)
Papa -thinks there might be another whole leg of the market to go down -dollar can get significantly weaker
b)
Why the banks stepped in -everything was connected -and if it wasn't saved -it would unravel the entire industry
One.
More serious things are -more likely they get solved
i)
Short the dollar vs. the BRICs currencies
One.
Only invested in things she felt stronger about -
ii)
US is no longer largest user of commodities (other than oil) -China now is
iii)
Sue -
c)
Papa won't go into the market full time until the price of oil breaks -biggest go button is when Oil falls
First.
Market is overvalued or oil is -very interesting correlation
One.
Real oil prices stand at historic highs, S&Ps at historic medians
i)
Lloyd Kurtz Thoughts
d)
Q1 earnings largely better than expected
e)
XLF at historical lows -good quality names
One.
RSX -retailers -Sue doesn't like them
Two.
XTB -homebuilders
Three.
Rebound strategy
i)
Kid's account
f)
Fannie Mae reported big loss -shares jumped up a couple %
i)
If Economy gets in trouble -I will rain money from the sky
ii)
50% of people who bought a home in 2006 have walked away
iii)
Most significant investment event -is Fed bailing out Bear Stearns
g)
Papa and Mom's account since Jan 25 -up 12.5% and 9.5% respectively
h)
Prolonged recession -early 80s -double barrel, 80 & 82
5)
Unfiled Notes Page 2
50% of people who bought a home in 2006 have walked away
iii)
If markets go down -US will give you
i)
Papa and Mom's account since Jan 25 -up 12.5% and 9.5% respectively
h)
More likely to see oil at $180 a barrel than $60 a barrel
One.
If a trigger for bull market -there is a ton of money on the sidelines looking to be invested -especially in the ancillary markets
Two.
Papa -demand for oil is continuing to outstrip the supply
i)
If oil breaks -will Russia and other countries go down?
i)
*Side thought -EU Financials have not announced yet -can EU support them like the Fed supported our banks?
Unfiled Notes Page 3

1/25/2008 - Investment Meeting

Notes from meeting-
Jack Sullivan, Susan Foley, Thomas Foley

Market Stats

Dow
12,374.14

4.47 (0.04%)


Nasdaq
2,367.06

6.14 (0.26%)

S&P 500
1,350.97

1.10 (0.08%)

10-Yr Bond
3.6550%

0.0150






Currency Cross Rates
Currency U.S. $ ¥en Euro Can $ U.K. £ AU $ Swiss Franc

1 U.S. $ 1 107.2650 0.6813 1.0043 0.5050 1.1340 1.0984
=

Market Overview
Getting weaker
Interest rates -> stable to down
Commodities -> flat to down
World Economic Growth - Slows

Negatives:
January Disasters

Recession following election

Subprime - 3x

Globally more correlated than believed

War?

Neutral:
Weak Dollar - still currency of choice

Positive:
Venture Capital/Private Equity/Hedge Fund - record capital raised on books - lots of cash on hand - looking to find a home

Real Estate opportunities for investment - "paucity of real estate

Asset Classes - we need a chart to show the returns in different sectors over last couple years




Other Points -
Unemployment Rate
FED - US still is skittish about new Chairman - Stimulus package will largely be unnoticed
Democrats - negative for drug index
GDP Guesses on where it will be - Papa - '08 - 1%, '09 - 1.5% … Susan - '08- 2%, 2%+ … Thomas - '08 - <1&, '09 - >2%
Possibility for a BIG inflation run
China Unemployment - 11-9%, wrong numbers … Thoughts that China and India might slow down to 6% growth
European growth - 1%
Things to look for:
10 Year Bond

Investment Strategies:
Q1-Q2: Most likely in Cash

When ready to invest - Grandchildren's Account - 50% International/50% Domestic

Possibilities - Financial ETFs

Papa's Account
70%: 50%- QQQQs, 20%- Rus (commodities), 10%-Brazil (commodities), 10% - India (consumer), 10%- China (consumer)
30%: 20%- Natural Gas, 20%- Gold, 20%- Copper, 20%- Zinc, 20%- Nickle

Susan's Account Proposal -
50% US - 20%Large Cap Growth, 10%- QQQQs, 20% Russell 2000
50% International - 10% China, 10% India, 10% Europe, 10% Emerging Markets, 10% - Brazil, Rus, South Africa

Alternative - Financial ETF
Bank of America - 39.96
Wells Fargo - 30.48
Bank of Chicago
Wachovia - 36.79
Citigroup - 26.94
GS - 194
JPM - 44.14
MS - 49.12

Patrick Notes:

January Swoons:

January 2008 is on track to be one of 6 worst January declines since 1926. Averaging the six worst January periods – the following 24th month period in the S&P 500 was up 26%. This would lends support towards Sue’s optimism on a market rebound.

3 Prior Crash Charts:

Does not account for all recessions – Back to back recessions for 80-82 saw a peak to trough decline of 33%, 73-75 was 46%,. Dad compared this prospective recession to be most like that of 80-82. Also, keep in mind the 2001 recession continued to see a precipitous decline as the Fed aggressively lowered rates down to 1%.

Impact of financial stimulus on consumer:

The conventional thinking is aggressive fiscal stimulus we spur consumer spending. I posit it will stabilize consumer spending, and as such will not drive the similar economic expansion 2003. If the American debtor gets a shot to maintain low cost of debt, it will not allow them to take off on a spending spree. It will however, keep them out of default. This is anecdotal evidence from a person who has a slight exposure to variable debt.

Michael Sharf: "Agree with everything except the emerging consumer plays from pappa. I think you have to go basic materials and infrastructure from emerging markets, especially resource rich ones eg Russia, Brazil. Maybe look into some kind of a Saudi/ Dubai construction/infrastructure etf/Reit. commodity demand profits those sovereign funds and that money will be spent on infrastructure development. I was looking at GuruFocus.com and some of the big investors, I think George Soros included, were way overweight basic materials. I think that it is too hard to predict where growth in India and China will be, but a blunt approach to it would be basic materials.

The end of the email is definitely on point though, there is a lot of noise right now caused by these plans to fix the problems. Only reversal, and reprising can fix the problems fully- instead of putting lip stick on them."

Nicholas Nolan - look at the distressed company funds - more to come next week.


Idea: Unemployment rate is too high - ~7% means we are headed/in a recession.

3 Prior Market Crashes
Wednesday, January 23, 2008 | 12:45 PM
Here's a comparison of 3 prior market crashes: 1930, 1962, 1987 and today. (Note that there is no guarantee that this will be a crash, or if it is it will be the same as those others):
1930 1962 1987 2008


We are getting to a point where markets are oversold, and due to bounce. But understand what odds we are facing here: A deep recession likely awaits us, and with it, earnings compression, and lower -- often considerably lower -- stock prices.
We will hear a lot of noise about Fed action, stimulus plans, etc. -- every reason why you should jump back in here -- but all that intervention will accomplish is delay the inevitable washout.