World Economy Big Picture

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A big picture and view of the world economy on the 4rth quarter of 2012

Transcript of World Economy Big Picture

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  • Octobe

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    at low levels. ants do not haownside. The

    on in place a c

    re View 201

    the price of be that has gonthat could bet all means siary, all-in or

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  • October 2012

    Accuvest Global Advisors 4th Quarter Big Picture View 2012 9

    Volatility is low making options less expensive.

    Hedging a portion of the equity

    portfolio during the sugar high of

    QE3 could be prudent

    Country rotation continues to be one of the best tools to get efficent stock market exposures

    portfolio can be sold at a predetermined price, thus minimizing downside price moves. There is no limit to participating in gains in the market if prices move higher. The cost of the option would be lost in such a scenario, but that is the case with most insurance. The analogy of insurance is appropriate in that the cost of a hypothetical hurricane policy is low if there are presently no clouds in the sky. And just because you have insurance on your home, that doesnt mean you want a hurricane to appear. However, if it does you are protected. This works well in portfolio management as one can retain intact full exposure to strategies that have been in place with a longer-term view. Volatility Index

    Harvest gains. Some marginal selling of positions that have run their full course and are expensive relative to other stocks can certainly make sense as well. This kind of management clearly fits in the Tactical ring of CST portfolios which means the portion of a portfolio that can be in or out of the market must be limited. This is important because there is a risk in making a call that an index, a theme, a country, or a strategy is fully exhausted, can be sold and then re-bought at better levels. Persistent and consistent gains cannot be counted on in this kind of approach. Rotation of country exposure. A fitting analogy would be that of a horse race; you are not exiting the race, merely changing horses to one that seems to have better prospects from this point in the race. This kind of concept fits with the buy low, sell high theme as a portfolio is swapping out of a fully-valued asset into one that is relatively cheap. With a wide disparity amongst countries fiscal and monetary policy as well as political stability, the opportunity for meaningful and beneficial relative returns is clear. View again the country ranking data above and note the range in P/E ratios alone of 5.5x to 22.6x. The stock markets attractive relative valuation should drive prices higher over time. Once again, however, the short-term has been driven by liquidity while fundamentals have waned. The following table shows year-end S&P 500 levels as well as the P/E ratio that would be in place at that time given the analysts earnings estimates. This kind of valuation seems reasonably attractive, although notice that forecasts are for index levels more or less in line with where the market is now. The subsequent chart shows how these earnings estimates have been falling as of late which gives one pause when considering current price levels.

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    2012 EPS

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    S 201214141313141412131114141313141411

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